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Do active fund managers care about capital gains tax efficiency?

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  • Fong, Kingsley Y.L.
  • Gallagher, David R.
  • Lau, Sarah S.W.
  • Swan, Peter L.

Abstract

This study investigates the tax efficiency of actively managed equity funds by conducting a previously unaddressed natural experiment. Specifically, we examine whether asset sales were timed to take advantage of the introduction of a substantial discount to realized capital gains when the holding period was at least 1Â year. Institutional equity fund management in Australia is principally focused on the pre-fee and pre-tax performance surveys of leading asset consultants. Given this industry setting, our study is important because tax efficiency is not accounted for directly in the reported performance numbers, and is thus opaque. We find that active fund managers overall have significantly increased the proportion of long-term capital gains realized after the change in taxation code, although there are significant variations across funds. We also find that active fund managers realize more long-term gains on both large capitalization and low volatility stocks.

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Bibliographic Info

Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

Volume (Year): 17 (2009)
Issue (Month): 2 (April)
Pages: 257-270

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Handle: RePEc:eee:pacfin:v:17:y:2009:i:2:p:257-270

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Web page: http://www.elsevier.com/locate/pacfin

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Keywords: Portfolio management Capital gains tax Active management;

References

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  1. Grinblatt, Mark & Keloharju, Matti, 2000. "Tax Loss Trading and Wash Sales," University of California at Los Angeles, Anderson Graduate School of Management qt0dq642kg, Anderson Graduate School of Management, UCLA.
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  9. Nanda, Vikram & Narayanan, M. P. & Warther, Vincent A., 2000. "Liquidity, investment ability, and mutual fund structure," Journal of Financial Economics, Elsevier, vol. 57(3), pages 417-443, September.
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  12. repec:fth:pennfi:68 is not listed on IDEAS
  13. Gordon J. Alexander & Gjergji Cici & Scott Gibson, 2007. "Does Motivation Matter When Assessing Trade Performance? An Analysis of Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 125-150, January.
  14. Li Jin, 2006. "Capital Gains Tax Overhang and Price Pressure," Journal of Finance, American Finance Association, vol. 61(3), pages 1399-1431, 06.
  15. Constantinides, George M, 1983. "Capital Market Equilibrium with Personal Tax," Econometrica, Econometric Society, vol. 51(3), pages 611-36, May.
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  17. Joel M. Dickson & John B. Shoven, 1993. "Ranking Mutual Funds on an After-Tax Basis," NBER Working Papers 4393, National Bureau of Economic Research, Inc.
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Cited by:
  1. Clemens Sialm & Laura Starks, 2009. "Mutual Fund Tax Clienteles," NBER Working Papers 15327, National Bureau of Economic Research, Inc.

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