Abstract
This study examines whether the management style of a fund differs depending on the type of fund being managed for tax purposes, given the rules of temporary tax relief for fund investments. The study considers a change in the ratio of tax-favored assets to the net asset value of a tax relief qualified fund around the effective date of tax relief laws in South Korea in 2007 and 2016. A regression model is used to test sample data from domestic and overseas equity funds available in the three months before and after the 2007 and 2016 Restriction of Special Taxation Act came into effect. It was found that the ratio of the value of tax-favored assets to the net asset value in the tax relief qualified fund increased significantly since the enactment of tax relief laws in both 2007 and 2016. These findings suggest that fund managers may try to change the asset allocation in a managed fund to increase the after-tax return of the fund investor, which means that fund managers do take into account the potential tax burden on fund investors and try to minimize it. AcknowledgmentThis work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF- 2019S1A5A8035027).
Highlights
Do mutual fund managers care about tax factors for fund investors? Investors often choose a particular type of business organization or transaction type in order to reduce the tax burden (Scholes et al, 2016)
This study examines whether the management style of a fund differs depending on the type of fund being managed for tax purposes, given the rules of temporary tax relief for fund investments
It was found that the ratio of the value of tax-favored assets to the net asset value in the tax relief qualified fund increased significantly since the enactment of tax relief laws in both 2007 and 2016
Summary
Do mutual fund managers care about tax factors for fund investors? Investors often choose a particular type of business organization or transaction type in order to reduce the tax burden (Scholes et al, 2016). Do mutual fund managers care about tax factors for fund investors? A mutual fund investor entrusts his or her investment to the fund manager to invest in a financial product that can be managed to some extent at the fund manager’s discretion. The fund manager may have an implicit incentive to maximize the after-tax rate of return by constructing an asset portfolio within the fund in a direction that is advantageous to the fund investor (Ferson & Mo, 2016; Adcock et al, 2020). The proportion of tax-favored assets in the fund’s asset portfolio is increased if it is composed mainly of assets with a high after-tax return, or if the rate of return is the same (Chan & Chen, 1992).
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