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Mutual fund tax implications when investment advisors manage tax-exempt separate accounts

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  • Beggs, William
  • Hill-Kleespie, Austin
  • Liu, Yanguang

Abstract

Investment advisors to mutual funds often operate investment vehicles, such as separate accounts and private funds, in addition to managing mutual funds. This study investigates tax consequences for mutual fund shareholders subject to these arrangements. We find investment advisors with a greater presence of tax-exempt separate account clients (SAs) pass through capital gains distributions that place a significantly greater tax burden on shareholders of their mutual funds. Tax implications for mutual funds are most pronounced when managers have strong fee-based incentives to cater to tax-exempt SAs. Performance analyses of mutual funds managed by advisors with tax-exempt SAs suggest that before-tax outperformance compensates shareholders for the additional tax liabilities incurred.

Suggested Citation

  • Beggs, William & Hill-Kleespie, Austin & Liu, Yanguang, 2022. "Mutual fund tax implications when investment advisors manage tax-exempt separate accounts," Journal of Banking & Finance, Elsevier, vol. 134(C).
    • Handle: RePEc:eee:jbfina:v:134:y:2022:i:c:s037842662100265x
    DOI: 10.1016/j.jbankfin.2021.106313
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    More about this item

    Keywords

    Investment advisors; Mutual funds; Institutional asset management; Taxable distributions;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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