I am looking for some data on the average tax drag on domestic (US) mutual funds for both equity and Fixed income. This probably goes hand-in-hand with turnover data. Any idea where I could get my hands on this info? Thanks.
I don’t think this will be easy to find. Working for a mutual fund company I can tell you I would have a tough time even coming up with it for our own funds. You’d have to find cap gains (both long and short term) and income distributions for all the funds plus have the shareholders’ tax bracket info. The “average” for equity funds wouldn’t really mean anything anyway since different styles affect a fund’s tax efficiency. And, just a side note, many equity funds are going to have a significant tax loss carry-forward for a year or two (at least) so taxes on cap gains won’t be an issue.
I guess I was looking more for an academic study that would have done the work for me already. Standard presentation stuff dictates that the top bracket must be used I believe (though I could be wrong). What bothers me is that I have seen the data before and I can’t remember where…
I think DFA/Fama-French have some stuff…I’ll check and post if they do
Investors typically underestimate the tax costs associated with investing in mutual funds. A better understanding of these costs can allow advisors to structure more tax-efficient portfolios for their clients and promote a better investment experience for those with taxable accounts. This article summarizes the findings of a study of the tax costs associated with active mutual fund management. The study measures the tax cost reported by all actively managed funds in the Morningstar universe. Tax costs are summarized by asset class categories identified by Morningstar. The study reports the average tax costs for each asset class category and the tax costs for the ten largest actively managed funds in each category. It also reports the tax costs of the Dimensional mutual funds included in each category. Tax Efficiency of Mutual Funds Beginning in 2002, the Securities & Exchange Commission mandated that investment companies disclose after-tax returns to allow investors to estimate tax costs. Mutual funds disclose after-tax returns for 1-, 5-, and 10-year periods on both a “pre-liquidation” and “post-liquidation” basis for a taxable investor. Pre-liquidation after-tax returns assume that the investor continued to hold fund shares at the end of the measurement period. As a result, they include the effect of taxable distributions by a fund to its shareholders, but not any taxable gain or loss realized by a shareholder upon the sale of fund shares. This calculation quantifies the tax consequences resulting from portfolio manager decisions. Post-liquidation after-tax returns assume that the investor liquidated fund shares at the end of the measurement period. As a result, they include the effect of both taxable distributions by a fund to its shareholders and any taxable gain or loss realized by the shareholder upon the sale of fund shares. This calculation quantifies the tax consequences resulting from portfolio manager decisions and the fund shareholder’s actions. Tax Costs of Active Management The difference between the pretax return and the pre-liquidation after-tax return is used as a measure of tax costs. Click on the PDF below for a summary of the tax costs for the 1-, 5-, and 10-year periods ending December 31, 2008. It is interesting to note in five out of the eight categories, the 1-year 2008 tax costs were greater than the 10-year annual tax costs. Morningstar Tax Costs Investors in actively managed funds paid dearly for active management in the form of taxes in one of the worst performance years on record. What makes these tax costs even more significant is that they are based on 2008 tax laws when the long-term capital gains tax rate was at its lowest in the 10-year period (15%), the ordinary income tax rate was at its lowest (35%), and the qualified dividend income tax rate was applied to a portion of dividend income (15%). The SEC pre-liquidation after-tax return uses the highest marginal tax rate in effect. For the tax years 1999 through 2002 the long-term capital gains rate was 20% and the highest marginal ordinary income tax rate ranged from 38.6% to 39.6%. In the attached PDF you can find the ten largest actively managed funds’ tax costs by category. Starting on page 10 you will find the equity characteristics for the ten largest actively managed funds as of December 31, 2008. The equity characteristics help shed some light on the magnitude of the tax costs for the ten largest funds. For example, in the Large Blend category American Funds Fundamental Investors has 2.14% in bonds and 9.02% in cash as of December 31, 2008. Not only do these holdings reflect “style drift,” but they also generate income subject to the highest marginal tax rate. The study also reports the Dimensional mutual funds that fall into each category. The lower tax costs associated with the Dimensional mutual funds can be further divided between the non-tax-managed and tax-managed mutual funds. The large cap non-tax-managed funds in general have lower tax costs in comparison to the average active fund due to lower turnover associated with a passively structured approach to investing. The small cap non-tax-managed funds in general have lower tax costs for the 1-year and 5-year tax costs, but slightly higher 10-year tax costs in comparison to the average active fund. Dimensional’s disciplined asset class investment approach does result in tax costs when these narrowly defined asset classes (e.g., micro cap) have company migration out of the asset class. The tax-managed mutual funds report a lower amount of tax costs due to the tax management overlay than their non-tax-managed counterparts. Please keep in mind a few points when comparing returns. First, the issue of survivorship bias exists because the study reports only actively managed funds in existence as of December 31, 2008. The second issue is the asset class purity of actively managed funds, which may hold asset classes such as bonds that are taxed at marginal income tax rates rather than capital gains rates. We have no way of knowing what the fund invested in over the entire time period thus skewing the measure of the tax costs of their equity holdings and apples-to-apples comparisons with style-pure funds. As a result, it becomes difficult to compare the returns of a Dimensional US equity mutual fund to a category average that includes mostly actively managed funds. Thanks to Mark McLaughlin for his helpful comments and to Vanessa Woliver for assembling the tax data.
I’ve got a copy of the m* report, email me at email@example.com
Unit root, Where did you find this? I have access to DFA stuff. Edit: Crossed posts