Norbert Schlenker wrote:But how much of the extra return comes from higher dividends on Value versus Vanille? I don't know but I would be surprised if the average yield differential over the period wasn't as high as 3-4%.
Time to eat some crow before someone else presents it on a plate.
Since the inception of the value and growth series in 1975, the extra dividend yield on EAFE Value versus EAFE has averaged 0.4% a year. It has never been higher than 1% in any calendar year. So much for that argument.
Another crucial variable is turnover. EAFE Vanille has negligible turnover. I will be surprised if I get a number out of BGI that's less than 20% annually for EAFE Value; I wouldn't be surprised if it were much higher. That sort of turnover means capital gains taxes sooner rather than later, which again cuts into the total return gap.
Modelling this (plus the dividend gap) with 40% taxes on dividends and 25% taxes on capital gains, the incremental tax drag on Value over Vanille is 1.1% per year at 20% turnover.
That differential is not very sensitive to changes in turnover (1.0% at 10%, 1.2% at 50%), nor to changes in the tax rate on foreign dividends. It is pretty sensitive to changes in tax rates on gains, e.g. setting the rate on gains to 36%, which was about as bad as cap gains rates got in Canada during the period in question, raises the tax drag to about 2% a year.
Mitigating that is a much larger unrealized gain in Vanille at the end of the period - hence a much larger contingent tax cost - than in Value, where the residual unrealized gain is smaller. OTOH, the model uses a very naive model of turnover, selling a fixed portion of each portfolio every year. For Value in particular, which would have a tendency to sell securities that had appreciated more and keep securities that appreciated less in any given year, the model probably underestimates the tax drag.
Take what you like from those numbers. If past performance is any guide, then Value looks like a good long term bet in a non-taxable account. In a taxable account, the advantage is smaller, probably by at least 1%, perhaps vanishing altogether.
Mmmm, crow. Tastes just like chicken.