Newspaper article THE JOURNAL RECORD

The New Quest: Mutual Funds That Are Tax-Efficient

Newspaper article THE JOURNAL RECORD

The New Quest: Mutual Funds That Are Tax-Efficient

Article excerpt

By Kenneth N. Gilpin

N.Y. Times News Service

Wealthy Americans who watched Washington raise their taxes last summer are just beginning to feel the impact.

Reflecting new top tax brackets of 36 percent and 39.6 percent, withholding tables have been changed for this year, resulting in smaller paychecks. Because the law is retroactive to 1993, high earners face even bigger hits on April 15.

Given the tax increase, investors will make after-tax performance an increasingly important yardstick for mutual funds, investment professionals predict.

"My industry is only now beginning to think about after-tax returns," said Fred Taylor, chief investment officer and vice chairman of U.S. Trust Co. "But there will be more and more people who report on an after-tax basis."

Contributing to the bottom-line orientation will be an era of lower absolute returns, many investment professionals say.

Neal Litvack, executive vice president for marketing at Fidelity Investments, said there was "no way performance will be as good going forward in the next few years as it has been in the past, particularly in bond funds."

He added, "That will force people to maximize whatever returns they can get."

Morningstar Mutual Funds in Chicago began tracking fund performance last year on an after-tax basis, as well as pretax. "We want to see which funds have been most tax-efficient," said Don Phillips, Morningstar publisher.

For its calculations, Morningstar assumes the highest federal tax rate for income distributed by funds each year. The tax on long-term capital gains, investments held more than a year, remains lower than the top income tax bracket, at 28 percent.

Funds that keep turnover low, like index funds, tend to be more tax-efficient, Phillips said. Funds that rely on capital gains tend to higher after-tax returns than income funds.

Fidelity, which has begun monitoring after-tax returns for internal records, responded to investor concerns by adding the Fidelity Spartan Bond Strategist last year. …

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