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the least tax-efficient. But, because of its much lower turnover, the benefit of tax deferral is much lower than Asset Class 2. Based on the example in 'Deferral Benefit," you might think that we've settled on tax drag as the best measure to determine the tax deferral benefit of an asset class. But, that's still not quite right. Though tax drag is a better measure of tax deferral benefit than tax rate or expected return alone, it fails to account for the effects of compounding on any tax deferral benefit.' As "Effect of Compounding: p. x, illustrates, when we examine the returns over a long period of time. the tax deferral benefit of each asset class changes. After 20 years, the tax deferral benefit of Asset Class 1 is almost 300 percent, confirming conventional wisdom. So, why is this the result? Simply put, the tax liability saved each year will grow at the asset class's rate of return. The greater the annual return, the more powerful the cumulative tax deferral benefit, even if the tax drag is lower. In fact, return can have such an outsized effect on the long-term tax deferral benefit, that some asset classes that have a relatively low tax drag can exhibit surpris- ingly strong long-term tax deferral benefit. New Evaluation Metrics Taking all of this together. we make use of metrics that can help evaluate the utility of owning any asset class in a tax-free environment: one for vehicles like PPLI, in which taxes should never be realized, the tax-exemption multiple (TEM) and its counterpart for vehicles like PPVA, when taxes might ultimately be paid. the tax- deferral multiple (TDM). The mul- tiples measure the combined effects of tax drag and compounding to understand the overall tax-exemp- tion (or tax-deferral) benefit over a given period. "Better Predictors: p. x, demon- strates that, compared to tax drag, both TEM and TDM more accu- rately predict the long-term tax deferral benefit of an asset class. In this example, we assume that in Year 20, the portfolio will pass without income tax (TEM) or will JUNE 2014 be fully withdrawn and taxed (TDM). In both cases the TEM and TDM are superior predictors of the asset class with the greatest tax deferral benefit in Year 20. Next, we put the metrics to work in actual asset class- es. "Asset Class Assumptions and Tax Deferral Benefits," p. x, shows a number of asset classes with our long-term (10 year) expected returns, yield and turnover. We cal- culated tax drag in the conventional way and also calcu- lated TEM (20 years) and ranked them by TEM. An interesting observation from this chart is that closervaUon frt., • • Oi./ Chart thiat hedge fi.4-ids aren.: ;:isms y1 the loc., five asset classes offeric; the sireatcst n t a << rno: is -iv' I . hedge funds aren't among the top five asset classes offer- ing the greatest utility in a tax-exempt environment. In fact, they aren't even in the top 10. This casts serious doubt on the conventional view that hedge funds arc Effect of Compounding Over time, the tax deferral benefit of each asset class changes Cirlierence in Value After Value After Value After One Year One Year One Year (Tax deferral in it', tax Free Benefit} Value After 20 Years Tar.ite Value After 20 Years Tay. Fro:, Dif Come in Value After 20 Years (fax Deferral Asset Class I Sli.3minicn $11 SIL.;XX3 1112.8 minion $13M million $24.6 million Asset (lass2 $10.2 million $10.8 million 18.000 136.Imillion $46.6mllim $9.9 million Note listrmis at, :u& slue of SP trit.that ytiAnS !a Me r.9; rwrs (Aslant Returac management tees Al iatues NI US. dollars. — Deutsche Asset & Wealth Management TRUSTS & ESTATES trustsandestates.com 21 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0112196 SDNY_GM_00258380 EFTA01454213