How Much Does Tax Erode Fund Excess Return?
54 Pages Posted: 22 Feb 2016 Last revised: 2 Feb 2018
Date Written: January 17, 2018
We model the tax drag from active funds management based on reported monthly holdings of active equity funds. Tax drag erodes 65% of the 0.74% excess return in Broad Market funds, but only 21% of the 1.80% excess return in Small-Cap funds for Australian superannuation (pension) fund investors. Tax drag varies with investment style; market state, and is most detrimental during bull markets; and fund turnover. For high-income individual investors, tax drag is exacerbated to the extent that active management only generates meaningful after-tax excess return for Small-Cap funds of certain styles.
Keywords: after-tax fund performance, active management, portfolio holdings, trades
JEL Classification: G23
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