Some of America's wealthiest investors are likely paying more than they know to Uncle Sam, according to a new study by Lipper, a fund research firm in New York. The report, "Taxes in the Mutual Fund Industry," found that fund investors in high federal income-tax brackets lose several percentage points on their returns each year by buying into funds that are not managed to minimize the impact of taxes.
Stock fund investors in the highest tax bracket lost an average of 2.5 percentage points on their returns to taxes each year over the past decade, the report indicated, while bond fund investors lost 1.3 percentage points each year. As a result, wealthy investors, on average, lose nearly a quarter of load-adjusted returns to taxes.
These investors, analysts say, may be better served by putting their money into tax-efficient funds. These funds aim to minimize taxes by offsetting stock gains with losses.
But tax-managed funds still go relatively unnoticed. They make up only 1.2 percent of all taxable mutual-fund accounts. The inclusion of pure index funds and municipal bond funds, which generate little or no taxable gains, brings that figure to 25.7 percent. But that still leaves $2.1 trillion from the nation's wealthiest investors in funds that Lipper describes as "tax-inefficient."
Lipper research analyst Tom Roseen, who authored the study, recommends that fund families and their boards focus more on after-tax performance. He adds that fund managers and advisers who work to minimize taxes should be rewarded with better compensation packages.