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

72 Pages Posted: 11 Nov 2019 Last revised: 15 Jan 2021

See all articles by William Beggs

William Beggs

University of San Diego School of Business

Alice (Yanguang) Liu

University of Arizona, Eller College of Management, Department of Finance

Date Written: January 15, 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 advisors 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, Tax Efficiency

JEL Classification: G11, G23

Suggested Citation

Beggs, William and Liu, Yanguang, Mutual Fund Tax Implications When Investment Advisors Manage Tax-Exempt Separate Accounts (January 15, 2021). Available at SSRN: https://ssrn.com/abstract=3468442 or http://dx.doi.org/10.2139/ssrn.3468442

William Beggs (Contact Author)

University of San Diego School of Business ( email )

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

Yanguang Liu

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

McClelland Hall
P.O. Box 210108
Tuscon, AZ Arizona 85721
United States

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