Do Taxes Affect the Performance Rankings of Mutual Funds?

Abstract

The purpose of this study is to determine whether taxes affect performance rankings of mutual funds on a pre-tax and after-tax return basis. The authors compare performance rankings for the entire universe of U.S.-based mutual funds in 12 categories and for 1-,3-,5-,10-, and 15-year performance periods. While the rankings in all categories do change somewhat, results show that the rankings do not change significantly. Therfore, the authors conclude that taxes do not significantly affect the rankings of mutual funds on a pre- and after-tax return basis. This is not to say that portfolio managers should not be concerned with after-tax returns, but rather that investors do not suffer from selection bias because funds report of pre-tax instead of after-tax performance.