From the point of view of Toronto-based NexGen Financial LP, aging baby boomers are an ideal target market for its family of tax-efficient mutual funds.

For many boomers, the tax aspects of investing are becoming increasingly important. These clients are moving from the “accumulation” years of diligently putting away savings and into the “disbursement” years, when they must use their savings and inheritances to create retirement income.

To help investors hang on to more of their investment income, NexGen came on the scene about a year ago with 14 mutual funds that allow clients more control over the timing and taxes they pay on interest, dividends and capital gains. With life expectancy increasing, it’s important to make retirement assets last as long a possible, NexGen’s founders believe.

“If you can pull your money out tax-efficiently, it will last a lot longer,” says NexGen CEO Jim Hunter, former president of Mackenzie Financial Corp., who joined a handful of other industry veterans to found NexGen. “Our funds are an investment product with a tax-planning solution built into it. Investors can make decisions about when they want to receive their income and in what form.”

NexGen has gathered about $85 million in assets in its family of mutual funds, as well as another $85 million in Macquarie NexGen Global Infrastructure Corp., a closed-end fund investing in the securities of infrastructure companies in 17 countries. More funds are in the works for next year, including closed-end and open-end choices.

“We know the difficulty of start-ups, and we went into this with our eyes wide open,” says Laurie Munro, president of NexGen and also a former executive with Mackenzie. “We knew it would take time for people to understand our structure and that we would have some missionary work to do.”

NexGen has separated its fund family into a tax-efficient corporate-class structure for taxable investments held outside registered plans, and a trust structure for non-taxable investments held in RRSPs or RRIFs.

The entire family of equity and fixed-income funds is available in either structure. For non-registered assets, each of NexGen’s 14 corporate-class funds is available in four classes that allow clients to choose from among various taxation features for the returns generated by the funds. Each client can choose the class that best suits his or her circumstances and may switch at any time among tax classes, as well as among asset classes and fund managers, without triggering tax consequences.

The NexGen tax classes that allow tax-free switching within the corporate-class structure include:

> Capital Gains Class. The objective is to increase value through capital appreciation. This class of funds is ideal for clients with tax losses from previous years that they wish to carry forward and deduct against the capital gains paid by the fund. The class is also suited for portfolios of minor children who have funds held “in trust” for them by adults. With “in trust” accounts, capital gains are taxable in the hands of the minor child and not the adult.

> Return Of Capital Class. Funds in this class provide fixed monthly distributions adding up to 7.5% a year, consisting primarily of return of investor capital. Return of capital is not taxable in the year received but will lower the cost base of the original investment, affecting the eventual capital gain or loss upon sale.

> Dividend Tax Credit Class. Monthly distributions amounting to 6% annually consist primarily of dividend income, which receives preferential tax treatment.

> Compound Growth Class. The objective is to maximize long-term growth through reinvestment of gains while minimizing distributions.

“Financial advisors need to step across the line and add value by creating tax-saving strategies for clients,” says Munro. “Taking fund distributions in whatever form they appear and whenever a fund company chooses to make them is not proper tax planning.”

The NexGen structure is like a multi-dimensional “Rubik’s cube,” Munro says, allowing clients to mix and match — first by choosing an underlying mutual fund and then by choosing the form in which they would like to receive income or gains generated by the fund.

CAPITAL GAINS ADVANTAGE

For example, a client wishing security of capital could invest in NexGen Canadian Bond Fund and, by choosing the capital gains class, could withdraw an annual income from the fund in the form of capital gains rather than the fully taxable interest income that bonds normally pay. Capital gains are taxable at only half the rate of interest income, which means the client would keep 50% more of the annual return than if investing in a regular bond fund.

@page_break@Alternatively, a client could choose to receive the same income in the form of dividends or in return of capital, which would defer taxes entirely. In the latter case, the fund’s adjusted cost base would be lowered each year by the amount of the distribution, building up a larger potential capital gain down the road when the client decides to exit entirely from the fund family. Once the cost base is reduced to zero, which would take 13.5 years at an annual 7.5% withdrawal rate, the client could switch classes and take future distributions in the form of capital gains.

“NexGen deserves high marks for innovation,” says Rudy Luuk-ko, investment funds editor at Morningstar Canada in Toronto. “It’s a leader in designing a tax-efficient fund structure.”

NexGen has recruited two outside advisors to manage some of its funds: Robert McWhirter, president of Selective Asset Management Inc. , and John Zechner, president of J. Zechner & Associates, both of Toronto. Last November, for the third year in a row, McWhirter won the Canadian Investment Awards’ Science & Technology Equity Fund of the Year, based on his record at Northwest Specialty Innovations Fund, which he also manages.

Then, in March of this year, NexGen hired Jonathan Baird as vice president of investments. An industry veteran, Baird was a fund manager for Dynamic Mutual Funds Ltd. and ran his own investment firm for several years. Baird manages all classes of NexGen Global Value Fund. He joins Jeffrey Young, vice president of investments, on the in-house team. IE