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Tax-Efficient Asset Management: Evidence from Equity Mutual Funds

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  • Clemens Sialm
  • Hanjiang Zhang

Abstract

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 funds’ investors. Such tax avoidance strategies constrain the investment opportunities of the mutual funds and might reduce their before-tax performance. Our paper empirically investigates the costs and benefits of tax-efficient asset management based on U.S. equity mutual funds. We find that mutual funds that follow tax-efficient asset management strategies generate superior after-tax returns. Surprisingly, more tax-efficient mutual funds do not underperform other funds before taxes, indicating that the constraints imposed by tax-efficient asset management do not have significant performance consequences.

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  • Clemens Sialm & Hanjiang Zhang, 2015. "Tax-Efficient Asset Management: Evidence from Equity Mutual Funds," NBER Working Papers 21060, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:21060
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    Cited by:

    1. Gjergji Cici & Alexander Kempf & Christoph Sorhage, 2017. "Do Financial Advisors Provide Tangible Benefits for Investors? Evidence from Tax-Motivated Mutual Fund Flows," Review of Finance, European Finance Association, vol. 21(2), pages 637-665.
    2. Kontoghiorghes, Alex, 2022. "Do personal taxes affect investment decisions and stock returns?," Bank of England working papers 988, Bank of England.
    3. Nicholas Moehle & Mykel J. Kochenderfer & Stephen Boyd & Andrew Ang, 2021. "Tax-Aware Portfolio Construction via Convex Optimization," Journal of Optimization Theory and Applications, Springer, vol. 189(2), pages 364-383, May.
    4. Marcel Fischer & Michael Gallmeyer, 2017. "Taxable and Tax-Deferred Investing with the Limited Use of Losses," Review of Finance, European Finance Association, vol. 21(5), pages 1847-1873.
    5. Zhe Chen & David R. Gallagher & Graham Harman & Geoffrey J. Warren & Lihui Xi, 2020. "How much does tax erode fund excess returns?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3407-3446, December.
    6. Liqun Liu & Zijun Wang, 2020. "Tax avoidance and asset returns: some theoretical results on the tax clientele effects," Economics Bulletin, AccessEcon, vol. 40(1), pages 41-49.
    7. 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).
    8. Samuel M. Hartzmark & David H. Solomon, 2020. "Reconsidering Returns," NBER Working Papers 27380, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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