| Mutual fund performance persistence has been widely examined in empirical research. Importantly, research has been focused toward test of market efficiency or value added by mutual fund managers. A rational investor in a taxable environment should not be concerned with the pre-tax return of the mutual fund, but rather the after-tax return. This research examines the question of whether mutual fund managers have tax-managed mutual funds to increase the fund performance persistence on an after-tax basis. Secondly, I present a preliminary examination of the role of turnover in mutual fund distributions. Turnover is widely believed to increase distributions; however, the effect need not be constant.; After-tax mutual fund performance persistence is examined utilizing raw returns and risk-adjusted returns. Using raw returns, I find that mutual fund performance persistence is increased on an after-tax basis. That is, more mutual funds are likely to retain their ranking on an after-tax basis when compared to the number of funds retaining their ranking on a pre-tax basis. On a risk-adjusted basis, I find that a longer holding period has increased performance persistence when compared to a shorter holding period. In general, the risk-adjusted tests show a slight decrease in after-tax performance persistence when measured as the increase in excess return. The application of taxes decreases the return of the top performing mutual funds, but increases the performance of the bottom performing funds as a result of capital losses. The performance gap between the best and worst performing funds decreases as the tax rate increases.; The examination of turnover indicates that turnover increases distributions at a decreasing rate. More importantly, I find that turnover explains little of the variation in mutual fund distributions. The most important factor appears to be the style of the mutual fund manager in realizing gains. A fund manager who defers gains reduces the taxable distributions made to shareholders. |
