How Much Does Tax Erode Fund Excess Return?

54 Pages Posted: 22 Feb 2016 Last revised: 2 Feb 2018

See all articles by Zhe Chen

Zhe Chen

Acadian Asset Management; University of New South Wales (UNSW); Centre for International Finance and Regulation (CIFR)

David R. Gallagher

Rozetta Institute

Graham Harman

Russell Investments

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics

Lihui XI

Macquarie Graduate School of Management; Capital Markets CRC Limited

Date Written: January 17, 2018

Abstract

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

Suggested Citation

Chen, Zhe and Gallagher, David R. and Harman, Graham and Warren, Geoffrey J. and XI, Lihui, How Much Does Tax Erode Fund Excess Return? (January 17, 2018). Available at SSRN: https://ssrn.com/abstract=2736062 or http://dx.doi.org/10.2139/ssrn.2736062

Zhe Chen

Acadian Asset Management ( email )

260 Franklin Street
Boston, MA 02110
United States

University of New South Wales (UNSW)

Kensington
High St
Sydney, NSW 2052
Australia

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

David R. Gallagher (Contact Author)

Rozetta Institute ( email )

Sydney

Graham Harman

Russell Investments ( email )

909 A Street
Tacoma, WA 98402
United States

Geoffrey J. Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )

CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia

Lihui XI

Macquarie Graduate School of Management ( email )

99 Talavera Road
Sydney, NSW 2109
Australia

Capital Markets CRC Limited ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia

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