Working Paper: NBER ID: w21060
Authors: 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.
Keywords: tax-efficient asset management; equity mutual funds; after-tax returns; performance analysis
JEL Codes: G11; G18; G23; G28; H2; H22; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax-efficient management (H21) | superior after-tax returns (G19) |
| tax-efficient funds do not underperform before taxes compared to peers (H21) | tax-efficient management does not significantly detract from performance (H21) |
| tax burden (H22) | performance (D29) |
| lower trading costs (F12) | superior performance (D29) |
| lowest tax burden quintile (H22) | outperform highest tax burden quintile (H21) |
| tax management strategies (H26) | fund performance outcomes (P17) |