Vanguard Takes Low-Key Approach to Calculating Tax Bite on Its Funds

The company will provide tax-adjusted returns in its funds' annual reports.
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Vanguard Group

announced a campaign on Monday to emphasize the after-tax returns of its mutual funds. But the low-key moves are likely to have little impact on the industry or on return-obsessed investors.

The effect of taxes on mutual fund returns has become a hot-button issue among fund companies, spawning a slew of so-called tax-efficient funds. Since April, a cursory review shows that

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and Vanguard have either introduced or proposed new funds with tax-efficient themes.

Vanguard now promises to calculate tax-adjusted returns for its equity and balanced funds (47 of 103 total funds) and include them in the funds' annual reports to investors. After-tax returns will be calculated using the highest marginal rate, currently 39.6%, and the top capital-gains rate of 20%.

"Taxes, for shareholders not holding mutual funds in tax-exempt accounts, are the single largest cost that they have," says Joel Dickson, a principal in Vanguard's portfolio review group. "We felt this disclosure is not being adequately addressed."

On average, Vanguard says, investors in the highest tax bracket give about 2.5 percentage points of their fund's total return back to taxes annually.

But Vanguard's push is not exactly a high-profile one. The index giant has never touted its returns in its advertising in the first place, instead building a brand around the low cost of its funds. So the new tax-adjusted returns aren't likely to show up in the company's ads.

John Rekenthaler, director of research at fund-tracker


, suggests the move is somewhat self-serving for Vanguard. Its best-known products -- index funds -- are, by nature, highly tax-efficient.

"Vanguard wouldn't be doing this if they weren't consumerists, but let's also be realistic. If Vanguard was consumerist with high-turnover, tax-inefficient funds, they wouldn't be doing this," Rekenthaler says.

Morningstar has been calculating tax-adjusted returns for thousands of funds since 1993. But the industry has been slow to do the same, says Rekenthaler, because the calculations can only make funds' returns look lower.

"That's why it's not until 1999 that you have a fund company offering these kinds of numbers," he says. "It's akin to putting the nutritional information on a can of Coke."



, which has notched stellar returns by investing heavily in technology and large-cap stocks, says it has no plans to start touting the after-tax returns of its funds.

"Let's not confuse tax efficiency with great performance," says Janus spokeswoman Jane Engalls. "Performance seems to be the thing that our shareholders seem to be most concerned about, and that's our goal."

Vanguard may have another problem on its hands when it comes to the average mom-and-pop investor. Because Vanguard conservatively uses the highest marginal tax rates when calculating tax-adjusted numbers, it will overstate the tax bite for small investors.

"It's an educational challenge for sure," says Gary MacDonald, a senior vice president at

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, a Boston consultant. "You want to make sure that people don't have a heart attack when they open up their statements."

Vanguard, for its part, seems to be up to the pedagogical challenge.

"As part of an overall education process, we've long said investors should be aware of the tax implications of their funds," Vanguard's Dickson says. "We see this as providing additional useful information to our shareholders."