Mutual Fund Tax Clienteles

Abstract

Due to the growth of defined contribution assets in mutual funds, fund managers face potential heterogeneity in their shareholder tax clienteles. About half of mutual fund assets are held by taxable investors, whereas the remaining assets are held by tax-qua-qualified investors (e.g., 401(k) accounts, Individual Retirement Accounts). We hypothesize that the managers consider their particular clienteles in decisions about the fund. We analyze whether mutual funds held by different tax clienteles differ in their characteristics and investment strategies. An important corollary that we address is whether constraints imposed by tax efficiency needs are costly to the portfolio managers by examining whether a performance difference exists between funds held primarily by retirement accounts versus those held primarily by taxable investors. Finally we examine the effects on flows into the fund according to their tax clientele, that is, whether fund flows and the sensitivity of the flows to performance differ according to tax clientele and further, whether the different types of investors differ in terms of their preferences for funds that are more or less tax efficient.