Do Active Fund Managers Care about Capital Gains Tax Efficiency?

30 Pages Posted: 7 Mar 2007 Last revised: 30 Mar 2008

See all articles by Peter L. Swan

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Kingsley Y. L. Fong

University of New South Wales - School of Banking and Finance

Sarah Lau

UNSW Australia Business School, School of Banking and Finance

David R. Gallagher

Rozetta Institute

Date Written: December 3, 2007

Abstract

This study investigates the tax efficiency of actively managed equity funds by conducting a previously unaddressed natural experiment. Specifically, we examine whether asset sales were timed to take advantage of the introduction of a substantial discount to realized capital gains when the holding period was at least one year. Institutional equity fund management in Australia is principally focused on the pre-fee and pre-tax performance surveys of leading asset consultants. Given this industry setting, our study is important because tax efficiency is not accounted for directly in the reported performance numbers, and is thus opaque. We find that active fund managers overall have significantly increased the proportion of long-term capital gains realized after the change in taxation code, although there are significant variations across funds. We also find that active fund managers realize more long-term gains on both large capitalization and low volatility stocks.

Keywords: portfolio management, capital gains tax, active management

JEL Classification: G23

Suggested Citation

Swan, Peter Lawrence and Fong, Kingsley Y. L. and Lau, Sarah and Gallagher, David R., Do Active Fund Managers Care about Capital Gains Tax Efficiency? (December 3, 2007). 20th Australasian Finance & Banking Conference 2007 Paper, Available at SSRN: https://ssrn.com/abstract=968871 or http://dx.doi.org/10.2139/ssrn.968871

Peter Lawrence Swan

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Kingsley Y. L. Fong (Contact Author)

University of New South Wales - School of Banking and Finance ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Sarah Lau

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

David R. Gallagher

Rozetta Institute ( email )

Sydney

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