The old saying goes, “It’s not what you earn, it’s what you keep.” The financial press is overwhelmingly interested in gross returns, as opposed to net, after-tax returns. One exception is a recent article by Eleanor Laise in the Wall Street Journal examining the uptick in popularity of tax-managed mutual funds.
Tax-efficiency is not rocket science, but it can be confusing for investors because different companies follow different strategies. Some companies follow strategies that are inherently tax-efficient. For the most part, without an explicit after-tax goal, portfolio managers are blissfully unaware of the tax consequences of their portfolio transactions.
It is hard to see how tax-managed mutual funds ever become a huge part of the mutual fund industry. This is due in part to investors short-sightedness in terms of trying to generate net, after-tax returns. The other reason is that tax rules seem to constantly be in flux. For instance today, the House is voting on a bill to extend today’s currently favorable tax rates on dividends.
One thing investors can do is keep an eye on expenses. No matter the tax regime, minimizing expenses will assist the investor in trying to keep more after-tax dollars.