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How much does tax erode fund excess returns?

Author

Listed:
  • Zhe Chen
  • David R. Gallagher
  • Graham Harman
  • Geoffrey J. Warren
  • Lihui Xi

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.

Suggested Citation

  • Zhe Chen & David R. Gallagher & Graham Harman & Geoffrey J. Warren & Lihui Xi, 2020. "How much does tax erode fund excess returns?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3407-3446, December.
    • Handle: RePEc:bla:acctfi:v:60:y:2020:i:4:p:3407-3446
    DOI: 10.1111/acfi.12483
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    References listed on IDEAS

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