Mutual Fund Tax Implications When Investment Advisors Manage Tax-Exempt Separate Accounts
72 Pages Posted: 11 Nov 2019 Last revised: 19 Oct 2021
Date Written: August 31, 2021
Investment advisors to mutual funds often operate investment vehicles, such as separate accounts and private funds, in addition to managing mutual funds. This study investigates tax consequences for mutual fund shareholders subject to these arrangements. We find investment advisors with a greater presence of tax-exempt separate account clients (SAs) pass through capital gains distributions that place a significantly greater tax burden on shareholders of their mutual funds. Tax implications for mutual funds are most pronounced when managers have strong fee-based incentives to cater to tax-exempt SAs. Performance analyses of mutual funds managed by advisors with tax-exempt SAs suggest that before-tax outperformance compensates shareholders for the additional tax liabilities incurred.
Keywords: Investment Advisors, Mutual Funds, Institutional Asset Management, Taxable Distributions
JEL Classification: H20, G11, G23
Suggested Citation: Suggested Citation