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The author is referring to the total return of the bond.I am confused by this statement in the linked report:
"There is a common misperception that holding a bond to maturity makes your portfolio immune to interest rate risk. The reality is, when rates rise, the total expected return from a bond is identical, regardless of whether the bond is held to maturity or sold at a loss and replaced with a bond that pays a higher coupon."
Seems to me that holding a bond to maturity does make your portfolio immune to interest rate risk. You will get the bond coupon and your principal back regardless of interest rate changes assuming the issuer does not default.
I believe the author eluded to tax harvesting the potential losses from selling a bond prior to maturity and pooling these losses against any gains. Then using remaining proceeds from the sale of the bond would be used to buy a higher yielding bond.I am confused by this statement in the linked report:
"There is a common misperception that holding a bond to maturity makes your portfolio immune to interest rate risk. The reality is, when rates rise, the total expected return from a bond is identical, regardless of whether the bond is held to maturity or sold at a loss and replaced with a bond that pays a higher coupon."
Seems to me that holding a bond to maturity does make your portfolio immune to interest rate risk. You will get the bond coupon and your principal back regardless of interest rate changes assuming the issuer does not default.
Aside from keeping turnover lower (and hence costs lower), other techniques used by tax-managed funds tend to limit what a fund can do and thus potentially impede pre-tax performance. Quoting from the paper's abstract:The average before-tax return is very similar for tax-managed funds and non-tax managed funds (0.27% vs. 0.26% per month). ... The average before-tax return is not significantly different between exchange-traded funds and matched open-ended index funds (0.50% vs. 0.51% per month).
The abstract continues: "Surprisingly, more tax-efficient mutual funds do not underperform other funds before taxes, indicating that the constraints imposed by tax-efficient asset management do not have significant performance consequences." Emphasis added. That is, the conclusion is only that tax-managed funds don't do worse, not that they do better.Mutual funds can reduce the tax burdens of their shareholders by avoiding securities that are heavily taxed and by avoiding realizing capital gains that trigger higher tax burdens to the funds’ investors. Such tax avoidance strategies constrain the investment opportunities of the mutual funds and might reduce their before-tax performance.
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