Understandable Artificial Intelligence

A.I. In Action:

A Tax Sensitivity Example

Sample Investment Goals

For this example we use the following assumptions and goals:

Our A.I. evaluated a universe of 2,743 funds

We highlight the Risk/Return trade-off with a focus on Mixed Allocation
- The average Mixed Allocation fund expects a 6.1% return with 13.8% SD

There is a negative relationship between income and growth
- The average Mixed Allocation fund has a slight value tilt and ~1% dividend

There is a strong relationship between yield from offshore bonds and tax
- The average Mixed Allocation fund enjoys a benefit of only 25bps from offshore bonds and a tax drag of close to 1%

We focus on 12 metrics in our base case

EDS base portfolio easily outperforms
Metrics of interest
- Each of these metrics is likely to be an important trade-off
- We will highlight each and show how different preferences can be implemented

We can break down portfolio decisions by any metric/group

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Using our example goals we have set out a neutral 'base' portfolio

We compare that to the average mixed allocation fund

Detailed and flexible inputs
- The inputs are a result of our machine learning process
- Can flexibly include any inputs you prefer
Traditional foundations: Return and Standard Deviation
- Return needs and risk tolerances will be specific to the investor
- In this example, we have improved both metrics and so will use these preferences going forward
Our first trade-off: The Sharpe Ratio
- This is a traditional metric which measures how much return expectation the investor gets per unit of uncertainty they accept
- This type of trade-off process is the same intuition we use across all metrics

Building on traditional foundations we use the same trade-off methodology across all investor preferences to 'get the most' from each

Offshore Bonds
- 5% of the original investment can be taken without tax implications
Capital Gains vs. Investment Income
- Which type is more efficient will heavily depend on circumstance
- For this example, we assume both income and capital growth are priorities
Importance of turnover
- Turnover causes gains to be realised and taxable
- High turnover and some vehicles (mutual funds) can lead to unexpected gains
Tax loss harvesting
- When investments realise losses, they can be used to offset gains
- This is a valuable tax efficient strategy
- Tax loss harvesting can be carried out through a separately managed account (SMA) or within your own investment strategy

High Income and High Growth

Exploring trade-offs allows us to express individual preferences

A High Income Preference
- We can customize preferences to meet client needs
Find the most efficient 'costs' to gain income
- In this example we gain 1.2% in dividend yield
- The 'costs' we incurred to achieve these are the mathematically defined minimum

It is possible to express any type of preference among these 12, or any other combination that you desire

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