Question

Consider the following trading and performance data for four different equity mutual funds:

Fund W Fund X Fund Y Fund Z Assets under Management, $294.3 $654.4 $1,286.4 $5,552.5 Avg. for Past 12 months (mil) Security Sales, $40.4 $573.8 $1,450.8 $428.9 Past 12 months (mil) Expense Ratio Pretax Return, 3-year avg. Tax-adjusted Return, 3-year avg. 0.34% 9.82% 8.82% 0.66% 10.60% 8.80% 1.11% 10.08% 9.58% 0.24% 9.97% 9.10%

1. Calculate the portfolio turnover ratio for each fund. Do not round intermediate calculations. Round your answers to two decimal places.

   Fund W: %

   Fund X: %

   Fund Y: %

   Fund Z: %

2. Which two funds are most likely to be actively managed and which two are most likely passive funds?

   Funds _________ and _______ are most likely passively managed portfolios; Funds ______ and _____ are most likely to be actively managed.

3. Calculate the tax cost ratio for each fund. Do not round intermediate calculations. Round your answers to two decimal places.

   Fund W: %

   Fund X: %

   Fund Y: %

   Fund Z: %

4. Which funds were the most and least tax efficient in the operations?

   Funds ____ and ____ were the most tax efficient and funds ____ and ____ were the least tax efficient.

Answer 1

(a).           Portfolio turnover is the dollar value of securities sold in a year divided by the average value of the assets:

                 Fund W: 40.4/294.3 = .1372 or 13.72%

                 Fund X: 573.8/654.4 = 0.8768 or 87.68%

                 Fund Y: 1,450.8/1,286.4 = 1.12779 or 112.779%

                 Fund Z: 428.9/5,552.5 = 0.0772 or 7.72%

(b)          Passively managed funds will have low portfolio turnover ratios and should have low expenses ratios. On this basis, Funds W and Z are the most likely passively managed portfolios; X and Y are most likely to be actively managed.

(c)           The tax cost ratio is compute as [1 - (1 + TAR)/(1+PTR)] × 100 where TAR represents tax-adjusted return and PTR is the pre-tax return. Our calculations are as follows:

                 Fund W: [1 - (1 + 0.0882)/(1+0.0982)] × 100 = 0.91%

                 Fund X: [1 - (1 + 0.088)/(1+0.1060)] × 100 = 1.627%

                 Fund Y: [1 - (1 + 0.0958)/(1+0.1008)] × 100 = 0.4542%

                 Fund Z: [1 - (1 + 0.0910)/(1+0.0997)] × 100 = 0.79%

(d)                 The tax cost ratio represents the percentage of an investor’s assets that are lost to taxes on a yearly basis due to the trading strategy employed by the fund manager. Funds Yand Z are the most tax-efficient (least assets lost to taxes) and Funds W and X were the least tax-efficient.