Client Newsletter - Tax Season 
March 2017   Vol. 21
MVT in the Field!
Brazil:  Emerging Markets, Soybeans and a Growing Middle Class 

MVT believes in a broad diversification strategy for client portfolioOppenheimer Developing Markets (ODVYX/ODMAX) is our primary emerging market fund.  It currently invests 8.69% of its fund in Brazil.  In 2016, the overall Brazilian stock market was a world leader, up 64.47%.

While I'm an investment advisor based out of Chicago, I'm also a southern Illinois farmer. Therefore, I'm particularly interested in crop production and distribution. For instance, Illinois soybeans are exported, with about half of them going to China, another emerging market, providing some positive export balance to our negative balance of trade with the world.  In the world’s soybean export market, 43 million metric tons come from the United States; Brazil is the world’s second largest exporter at 33 million metric tons, most of which goes to China as well.  That makes Brazil U S agriculture’s major competitor in world markets, and Brazilian crop size and exports are growing.

Over the last decade, Brazil grew its middle class from 17% of its population to 27%, moving 20 million of its people into a booming middle class that drives consumption and economic growth.   India, another emerging market country, only has 5% of its population in its middle class, but both Brazil and India are expected to continue substantial growth in this segment of their economies, driving up consumer expenditures and markets for goods of all kinds in both emerging and world markets as a whole.

So when I got a chance to go with a group of Midwestern and Canadian farmers to see soybean production in Brazil and witness this growth first-hand, it didn’t take me long to decide to go down in January and early February of this year.

Manaus is the Amazon's largest city, 900 miles from the mouth of the Amazon on the Atlantic Ocean.  It is surrounded by banana, papaya and acai farmers in the middle of the Amazon River.  Ocean-going ships arrive in its deep water port to a manufacturing center with a population of over 2 million.  Brazil’s industrial policy requires importers to also manufacture in Brazil, fueling lots of jobs in the interior of a country as large as the continental United States.

The heart of the soybean growing country is south of the Amazon rain forest in the state of Mato Grosso, which is as large an area as five Midwestern states.  Over 15 million acres of soybeans are grown there in a savanna called cerrado.  Its clay soils are productive and absorb about 80 inches of rain a year.  Still near the equator, the long growing season allows for two crops, usually corn or cotton following soybeans.  Some farms raise sugar cane, which is mainly used to make ethanol fuel.

Half of Brazil’s domestic vehicle fuel comes from ethanol, creating energy independence, complemented by their own large offshore oil discoveries by Petro Brasileiro in the Atlantic.  The United States uses only 10.1% ethanol in its vehicle fuel mix.

Minimum wages and worker protections are much stronger in Brazil than in the United States and include required double time beyond eight hours for minimum wage workers, plus employer paid pensions and health care for all employees.  Mandatory job training to operate equipment or learn new jobs is common and paid for by the Brazilian government.

Its politics are volatile, and the elected President was recently impeached and replaced by a Vice President of a different party.  Many farmers I talked to were happy the government is finally taking on corruption in operation Car Wash in the midst of this political turmoil.   International investors have long sought structural reforms to ineffective governmental systems in emerging markets and view such changes as positive and needed reforms.   It was interesting to see that the locals also agree.

The farmers grow high quality soybeans for export and haul them out to ports for hundreds of kilometers over poor, and often dirt roads in 52 ton trucks bought from  Volvo and BMW.  Infrastructure spending on roads, railroads, sewer systems and other needs has been held back for years by corruption, inflation, and an unstable currency.  Many farmers are seeking joint ventures with U S companies, like Archer Daniels Midland, to address these deficiencies through private sector investment and improve their access to foreign markets.

After talking to very hospitable Brazilian farmers in multiple locations and enjoying their willingness to compare notes and answer all of our questions, we stopped through Brasilia, the capitol, and visited the tourist area of Iguazu Falls before heading back north on the eight hour flight to Miami from Sao Paulo, which is now one of the largest cities in the world.

Economic growth in Brazil was both fun and eye-opening to see firsthand.  Long-term investment in emerging markets can lead to profits from these trends of economic growth and a growing middle class in world markets.  Feel free to contact me for additional information.

- David Vaught,

Please Welcome our Newest Addition, Amanda Vaught!
Amanda Vaught joined the firm as a Portfolio Analyst in February 2017 after 10 years of practicing law in New York.  She began her career as an intellectual property attorney, but spent the past several years working in financial and securities litigation at a major New York City law firm.  Her practice included litigation regarding allegedly fraudulent mortgage-backed securities, SEC investigations, and shareholder suits, amongst others. 

Amanda earned her Bachelor’s degree, with honors, in chemistry from the Johns Hopkins University. She then began a Ph.D. program in chemistry at Columbia University, but left the program early (with her Master’s degree) to pursue her legal career.  She attended law school at Boston University and graduated cum laude in 2007.  She is licensed to practice in New York and before the U.S. Patent & Trademark Office.  Her admission to the Illinois Bar is pending.  Amanda is a welcome addition to our firm as we are constantly growing our client list and expanding our services.  She will be an integral part of our analysis team, assisting in the area of fixed income management, performance assessment, marketing and client support.

Please feel free to reach out to Amanda via email at
Rates Are on the Rise:
Keep Calm and Continue to Save

The Fed raised rates another 0.25% on March 15th.  The Fed Funds Rate now enjoys a range of 0.75% to 1%.   In case you do not remember what the Fed Funds Rate used to look like, it was 5.25% in April of 2007.  Increasing rates are great for savers, particularly bond investors as it translates into higher income.  For instance, the 10-year treasury yield has been hovering around 2.5% in recent months.  This is a huge increase from the measly 1.5% we saw last summer.

However, spenders or those seeking credit in the form of car loans, mortgages and credit cards will soon feel the pain of increasing rates.  We encourage our clients to be smart about the debt they amass, and do not add debt just because "rates are going up."  

On the flip side, we remind clients not to drain savings and retirement accounts just to avoid paying some interest.  The amount of gains and income lost, not to mention the potential taxes and penalties that are placed on these types of withdrawals, are far too high to justify when a car loan that may only be 4% annually for up to 5 years.

If you are considering a large debt for any reason, please contact us first, so we can discuss its impact on your financial health.  - Danielle Woods,

The Magical Roth IRA!

I know I talk about these accounts a lot, but that's because they are good for you!  Not enough investors have Roth IRA accounts, and we want to rectify that. 

Why are Roth IRAs so great?

1.  It doesn't take a lot to get started.  Investors under the age of 50 can only contribute up to $5500 per year, and investors over the age of 50 can contribute up to $6500 per year.  We won't hold you to that maximum each year, but we encourage you to contribute as much as you can.

2.  While there are no tax savings at the initial contribution, the contributions and the earnings are tax-free FOREVER.  That's right.  These accounts have been in existence for nearly 20 years, and the government has never taken that away. 

3.  In addition to being tax-free upon withdrawal, the withdrawals don't impact your income.  Why is this important?  Other withdrawals, such as pension payouts or IRA distributions, will add to your overall income and be included in the total that is your Adjusted Gross Income (AGI).  That's the last number on page 1 of your 1040.  The AGI is often the magic number on other deductions and credits, not to mention impacts the amount of your Social Security income that could be taxable.  Roth IRA withdrawals are invisible as far as AGI goes.

4.  There are income limits for those who want to contribute.  If you are single with AGI over $118,000 or married with AGI over $186,000, in 2017, you will be limited at least partially in how much you can contribute.  But don't despair!  There are other ways around this.  We have two tools.  First is  Conversion, which is the rolling of existing IRA monies to a Roth IRA (you will pay the income tax on that conversion); or a Back Door Roth IRA.  If you don't already have IRA accounts (401ks are fine), you can make a contribution to an IRA and then immediately move it to a Roth IRA.  It takes a good tax preparer to know how to document it correctly on your tax return (don't worry, we know a few), but it's perfectly legal.

5. They are invested just like any other account.  You can invest in bonds, stock or both, just like any other investment account.  All earnings are tax-free as long as you don't remove them for five years or age 59 1/2, whichever is later.

6.  No withdrawal requirements!  Traditional IRA's require that you begin making withdrawals of approximately 5% of the market value of your account every year. Those are taxed at your regular income tax rate and are included in your AGI, whether you want to take the money out or not.  Roth IRAs are not required to be withdrawn at any time.  

7.  Your beneficiaries won't pay any tax if you pass away with money in your Roth.  Roth beneficiaries may receive the value of the portfolio completely tax-free.  Some restrictions do apply.

8.  You have until April of the following tax-year to make contributions for the current calendar year.  This comes in handy when you first begin an account in the early part of the year or if you think you may earn too much to contribute.  You can make a decision on your contribution after you've had your taxes done.

Still not convinced?  Let's have a little math lesson.  

Investor 1 - Ernie contributes $5500 annually to his pre-tax 401k plan at work for 20 years.  Ernie is in the 25% tax bracket and saved $1375 per year or $27,500 for 20 years for these contributions.

Investor 2 - Bert contributes $5500 annually to his Roth IRA for 20 years.  There is no immediate tax savings.

Both accounts grow 5% annually over the course of 30 years and are worth approximately $383,000 at retirement.   Both Ernie and Bert begin withdrawing $40,000 per year and collect Social Security Income.

Investor 1 - Ernie is still in the 25% bracket because his IRA distribution and SSI contribute to his AGI. He must pay $10,000 in income tax on his IRA distributions.  This comes to $200,000 over 20 years, not counting the tax he pays on his SSA income.

Investor 2 - Bert is only in the 15% bracket because his Roth distributions do not impact the taxability of his Social Security Income.  He pays no tax on his Roth IRA distributions or his SSA income.


Investor 1 - Ernie pays $172,500 ($200,000 - $27,500 in contribution savings) in taxes on his IRA distributions, not including the taxes he must also pay on his Social Security Income.  Keep in mind that he is paying these taxes as a retiree with no earned income.

Investor 2 - Bert pays a total of $27,500 while he was contributing during his working years.

Of course this example is based entirely on hypothetical numbers for fake people, but the savings calculations are real.  Who would you rather be?  Ernie or Bert?

If you are already enjoying the use of a Roth IRA but haven't increased your contribution in awhile, please consider doing so.  If you don't have a Roth IRA, call us to set one up!  

Danielle Woods,, 865.271.9439

So Far 1st Quarter 2017:  Smooth Sailing
The first quarter of 2017 has been nothing short of delightful in contrast to the harsh start of last year.  In January 2016, the consequences of China's overly leveraged economy coupled with the dive in oil prices caused markets to sink.  This year, the market is in a much happier place even though oil is still only $48 a barrel.  

Domestic stock markets are up about 7% through 3/15/17, while your international managers are all up around 8%.  The healthcare and technology sectors are soaring with returns over 13%. The only real dog in the bunch is REIT's, which are barely positive as interest rates climb for the first time in 8 years.  

Bonds are keeping their head above water with slightly positive returns.  The most productive are corporates and high-yielding municipals so far this quarter.  However, we fully anticipate some pullback in bond values as rates rise.  We think it is a small price to pay, and a temporary one, while interest rates return to more normal levels over the next couple of years.  You will continue to receive interest on the bonds, and that interest will increase over time as rates climb.

Please let us know if you have questions.  - Danielle Woods,
A Great Way to Start the Year:  
Award-Winning Managers and Fee Reductions!
We are pleased to announce that David Herro, portfolio manager for Oakmark International Fund (OAKIX), was named International Stock Fund Manager of the Year by Morningstar.  Oakmark International enjoyed an outstanding return of 7.9% last year*, during a year where the MSCI EAFE International Index only returned 4.5% and numerous international managers struggled.  Most of our client accounts hold this security, and it was a big help in the international sector of your portfolios.  We literally have thousands of funds available to us to choose from for you, and we do our best to find the best of the best and hang onto them for the long haul.    

Another big boon for our clients this quarter came in the form of fee cuts at your custodians, Charles Schwab and TD Ameritrade.  Schwab has reduces its individual stock and ETF transaction fees to $4.95 from $8.95.  TD Ameritrade lowered theirs to $6.95 from $8.95.  While there are many no-trade fee options,sometimes we think it's worth paying the fee to buy a certain fund.  We are glad that we can now do that with a much lower fee.  

American Funds New Perspective (NPFFX) now allows us to buy an institutional version, FNPFX, for our clients!  You will pay a trade fee of $25 per trade, but the annual fund management fee is down from 0.84% to 0.45% per year.  American New Perspective is a global stock fund that won Manager of the Year in 2015.

Last, but not least, those clients who own Pioneer Strategic Income (STRYX/PSRAX) can now buy the institutional version with no trade fee!  The fee has been $25 for years, so for smaller accounts we would often buy the more expensive retail version (PSRAX) to avoid the fee.  Now all of our clients can buy the institutional share class (STRYX) with no fee.  The change saves investors roughly 0.3% per year in management fees to the fund manager and no trade fee to boot!  Pioneer has been one of our oldest and most consistent performing multi-sector bond funds, and we are pleased that it is now even more client-friendly.

Please let us know if you have any questions.  - Danielle Woods,

*Past performance is no guarantee of future performance.
A Mixed Bag:  A Review of Others' Advice

Periodically, PBS airs a program called,  “Ed Slott’s Retirement Road Map."  Slott is a national public speaker and tax guru.  Overall, this show is informative but gives a mixed bag of advice in our opinion.    

First of all, Ed Slott is a tax advisor, not an investment advisor.  He focused the program on tax consequences of retirement-saving.  He states his goal is to have a tax-free retirement.  It is impossible to know the amount of taxes you will owe once you draw money for retirement.  After all, a person does not know how much money they will have saved or all of their sources of income in retirement.  Therefore, they will not know their tax rate.  He favors the certainty of knowing the amount owed today over a future unknown tax rate.  This may not be the best priority for most people.  As Danielle's above article titled, "The Magical Roth IRA!" points out, spending some extra money now can save a lot down the road, but everyone's circumstances are different.

One of the techniques Slott recommends for reducing your taxes in retirement is to convert your IRA funds to Roth IRAs.  This strategy may be effective for you.  In general, the earlier you convert the better.  This is both because younger people typically have lower earnings and are in a lower tax bracket, but also because they have longer for their earnings to grow before they retire.  When you convert your IRA funds to a Roth IRA, you will owe taxes on this conversion (hence the benefit of being in a lower tax bracket).  After the conversion, you will not pay taxes on Roth IRA distributions made at retirement age.  For investors in the higher tax brackets, however, the money spent on paying the taxes may be better utilized by increasing your contributions to your retirement or savings account.  The bottom line is that the conversion may be a good strategy for some but depends on your individual circumstances.  We would be happy to talk with you about what makes most sense for you.

Mr. Slott's other preferred strategy to have a tax-free retirement is to purchase life insurance.  He specifically recommends permanent insurance.  MVT generally does not recommend this strategy.  Permanent insurance is expensive, and Slott fails to mention their high fees.  You should buy only what you need to cover your risk.  A term life insurance policy is significantly cheaper than permanent insurance.  Save the difference and invest it in a way that allows you to retain flexibility and control.  One example is to purchase stock in a company who profits by selling insurance, like Berkshire Hathaway.  That way you can share in the profit of insurance companies rather than overpaying for your own policy.

Some advice that Mr. Slott gives that we do agree with is: (1) to withdraw from your IRA in your 60s and delay drawing Social Security until age 70 ½ if you can; (2) take care of yourself first – your child can take out loans for college, but there are no loans available for retirement; (3) rollover IRA funds directly and avoid indirect transfers which could leave you subject to taxes and penalties; and (4) ensure your beneficiary forms are updated.  If you are recently married or divorced or have lost a loved one who was meant to receive under your account, be sure to update your forms.

Finally, the best piece of advice from “Ed Slott’s Retirement Road Map” is to work with a knowledgeable financial advisor.  Mitchell, Vaught & Taylor, Inc. prides itself on its years of extensive experience in both investing and tax advice.   If you have any questions about your personal retirement savings plan, please call us first. 

- Amanda Vaught,

Mitchell, Vaught and Taylor, Inc.
Investment Advisors
53 W. Jackson Boulevard
Suite 905
Chicago, Illinois 60604
Phone: 312-922-1717

Games are won by players who focus on the playing field - not by those whose eyes are glued to the scoreboard.

 - Warren Buffet