The Abattoir of Large-Cap Value Fund Performance

In 1993, Joel Dickson and John Shoven came up with a breakthrough insight into the investment markets that they sought to publish in the 1993 National Bureau of Economic Research under the title “Ranking Mutual Funds On An After-Tax Basis” (Working Paper 4393). The paper never got published, but it measured the 1965-1990 investment markets to conclude that churn within the portfolio of mutual funds created significant tax liabilities that meant investors achieved significantly worse after-tax returns on investment than the advertised performance of the mutual fund.

The closest anyone came to picking up the research of Dickson and Shoven came in 2002, when Peterson, Pietranico, Riepe, and Xu published “Explaining After-Tax Mutual Fund Performance” in the FAJ. Their conclusions came with a counterintuitive spin: Although small-cap stocks are the most volatile, the ordinary 401(k) investor is actually more hurt by the behavior of other investors that own large-cap value … Read the rest of this article!