Investors with Advisers Opt for Tax-Managed Funds

Amid market turmoil and the approaching presidential election, American investors (with investments of $50,000 or more) are concerned about the impact of taxes on their mutual fund returns. According to a press release of the survey results, more than four in five (81%) say it is an important concern and nearly half (46%) say it is a very important concern.

The Adviser Tax Advantage

Eaton Vance found that investors with advisers are twice as likely as those without advisers to invest in tax-managed funds or other mutual funds specifically designed to minimize the effects of taxes (41% to 21%), according to the release. Investors with advisers are also more inclined (25%) to own tax-exempt municipal bonds than those who do not use an adviser (10%).

General interest in tax-managed investing is on the rise, but is not yet universal, according to the firm. The majority of investors (56%) would be inclined to consider tax-managed investing if it provided a reasonable expectation of realizing 2% more of a return per year after taxes. However, the majority of investors (66%) have not invested in tax-managed funds or other funds designed to minimize the effects of taxes, according to the release.

Eaton Vance also found that not many investors are aware that capital gains distributions have skyrocketed. The company said 29% of investors believe they will pay taxes on capital gains in 2008, as compared with 40% who paid them in 2007.

“Studies have shown that American equity investors may lose 2% in investment returns each year to taxes,’ said Duncan W. Richardson, chief equity investment officer at Eaton Vance, in the release. “Given the volatility of today’s markets and the potential for lower prospective returns, a tax-managed investment strategy that might recapture 2% per year in overall returns is compelling.’

Election Effect

More than three in five investors (62%) say they would take some type of action if Congress allows the maximum tax rate on capital gains to revert back to 35%, according to the survey. However, neither presidential campaign plans to do this.

Senator John McCain’s (D-Arizona) tax plan includes extending the lowered 15% rate on capital gains indefinitely. Senator Barack Obama (D-Illinois) wants to leave the capital gains rate alone for Americans making less than $250,000 a year but raise it to 20% for those who make more. Investors are more likely to change investment strategies if Obama wins the election than if McCain wins, according to the survey.

The Eaton Vance 2008 Investor Survey polled approximately 1,200 people across the country. The telephone survey was conducted by Penn, Schoen & Berland Associates, Inc., during July and August.