Tax Efficient Funds a Thing of the Past? Not for us.

A recent article* by Morningstar.com cited that a number of major mutual fund firms were closing some “tax efficient funds.” The reasons for the closings were that the funds had not attracted sufficient dollars, that investors may not feel these funds are needed or that they are too “gimmicky.”

We strongly disagree and feel that tax efficient mutual funds are very appropriate for taxable investments (investments that are not in retirement plans or IRA accounts). One of the primary benefits we can provide to our clients is the proper placement of their investments in the most tax advantageous investments. The tax efficient stock mutual funds that we recommend pay special attention to strategies that minimize the taxes that would be incurred by their shareholders. They do this by utilizing various trading strategies, tax loss harvesting and making sure that the timing of stock sales is most tax effective (such as paying attention to long term v. short term tax selling). Most regular stock mutual funds pay minimal attention to these issues.

The lack of investor attention and interest in tax-efficient funds is reflective of many investors’ short term memories. Just a few years ago, and certainly in the late 1990s, mutual funds and managed brokerage accounts generated huge taxable gains and distributions. While many mutual funds may hold tax losses now, that will not always be the case. Investors should continue to utilize tax efficient mutual funds, as that will provide them with the best opportunity for maximizing their after-tax investment return.

*Morningstar.com, Fund Times, May 25, 2009

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