Tax-Efficient Asset Management: Evidence from Equity Mutual Funds

Clemens Sialm and Hanjiang Zhang

No 21060, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G11 G18 G23 G28 H2 H22 H24 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-pbe
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Published as CLEMENS SIALM & HANJIANG ZHANG, 2020. "Tax‐Efficient Asset Management: Evidence from Equity Mutual Funds," The Journal of Finance, vol 75(2), pages 735-777.

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