Having Your Cake and Eating it Too: Tax Efficiency and Performance

Having Your Cake and Eating it Too: Tax Efficiency and Performance

January 18, 2014 Uncategorized
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(Last Updated On: January 17, 2014)

Tax efficient asset management: Evidence from Equity Mutual Funds

Investment taxes have a substantial impact on the performance of taxable mutual fund investors. Mutual funds can reduce the tax burdens of their shareholders by avoiding securities that are heavily taxed and by avoiding realizing capital gains that trigger higher tax burdens to the fund’s investors. Such tax avoidance strategies constrain the investment opportunities of the mutual funds and might reduce the before-tax performance of the funds. Our paper empirically investigates the costs and benefits of tax efficient asset management based on U.S. equity mutual funds from 1990-2012. We find that mutual funds that follow tax-efficient asset management strategies generate superior after-tax returns. Surprisingly, mutual funds that generate lower taxable distributions do not underperform other funds before taxes, indicating that the constraints imposed by tax efficient asset management do in practice not have significant performance consequences.

Lower tax and better performance? Awesome.


h.t. Mike P.

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Definitions of common statistics used in our analysis are available here (towards the bottom)

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.