Mutual Fund Tax Implications When Investment Advisors Manage Tax-Exempt Separate Accounts

72 Pages Posted: 11 Nov 2019 Last revised: 19 Oct 2021

See all articles by William Beggs

William Beggs

Knauss School of Business, University of San Diego

Austin Hill-Kleespie

G. Brint Ryan College of Business, University of North Texas

Alice (Yanguang) Liu

University of Arizona, Eller College of Management, Department of Finance; New Jersey Institute of Technology, Martin Tuchman School of Management

Date Written: August 31, 2021

Abstract

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

Beggs, William and Hill-Kleespie, Austin and Liu, Yanguang, Mutual Fund Tax Implications When Investment Advisors Manage Tax-Exempt Separate Accounts (August 31, 2021). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3468442 or http://dx.doi.org/10.2139/ssrn.3468442

William Beggs (Contact Author)

Knauss School of Business, University of San Diego ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

HOME PAGE: http://wcbeggs.com

Austin Hill-Kleespie

G. Brint Ryan College of Business, University of North Texas

Denton, TX 76203
United States

Yanguang Liu

University of Arizona, Eller College of Management, Department of Finance ( email )

New Jersey Institute of Technology, Martin Tuchman School of Management ( email )

University Heights
Newark, NJ 07102
United States

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