How much does tax erode fund excess returns? |
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| Authors: | Zhe Chen David R Gallagher Graham Harman Geoffrey J Warren Lihui Xi |
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| Institution: | 1. Acadian Asset Management, Sydney, NSW, Australia;2. The University of Queensland Business School, St Lucia, QLD, Australia;3. Russell Investments, Sydney, NSW, Australia;4. College of Business and Economics, The Australian National University, Canberra, ACT, Australia |
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| Abstract: | We model the tax drag from active fund management based on reported monthly holdings of active equity funds. Tax drag erodes 65 percent of the 0.74 percent excess return in Broad Market funds, but only 21 percent of the 1.80 percent excess return in Small-Cap funds for Australian superannuation (pension) fund investors. Tax drag varies with investment style; market state, which 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. |
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| Keywords: | After-tax fund performance Active management Portfolio holdings Trades |
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