Finding a tax-efficient mutual fund is as simple as looking for one with low turnover, right?

It may not be so simple, experts say. Indeed, low turnover generally produces more tax-efficient performance, but not always. Furthermore, funds with high turnover are not necessarily poor performers from a tax-efficiency standpoint.

"Turnover in the extremes can help you determine whether a fund is going to likely be tax efficient going forward, but there's not a direct correlation," said William Harding, an analyst with Chicago-based Morningstar. "Clearly if you have a fund with very low turnover, the fact of the matter is that the manager isn't trading a lot of names and you can fairly safely say the fund will be tax efficient."

Easy enough. But there are other factors to consider, starting with tax-loss selling. Index funds also offer another haven from the taxman.

Lower turnover "is really just a starting point. It's not a be-all and end-all of efficiency," said Duncan Richardson, chief equity investment officer at Eaton Vance Management in Boston. Some tax-managed funds have high turnover because the manager sells stocks low to harvest the loss, Richardson said.

"The media seems to oversimplify and say, if you want a tax-efficient fund, you should look at turnover ratio. Probably half of my turnover is due to tax trading. I could be much less [tax] efficient and have a lower turnover ratio," agreed Bill Nygren, portfolio manager for Oakmark Funds in Boston.

In fact, many actively managed, high-turnover funds are extremely tax efficient. For example, according to data from Thomson Wealth Management in Rockville, Md. (sister company of Thomson Media, publisher of this newsletter). American Skandia of Shelton, Conn., for instance, has the ASAF Founders International Small Cap Fund, with a three-year tax efficiency rate of 99.6% with 655% turnover.

Even though low turnover alone may not assure tax efficiency, index funds are often touted as good tax-efficient vehicles for investors.

"In terms of the index funds, most index funds are fairly tax efficient because they aren't really turning over the portfolio," Harding said.

The argument for index funds as efficient tax-management vehicles in some ways mirrors that argument for index funds as sound investment vehicles, period. When aiming for high after-tax returns, Richardson suggested that index funds are a red herring. "Index funds are nicely diversified and are relatively tax efficient, but it's true that active tax management can do a much better job on both returns and tax efficiency," he said.

Because indexes follow rather than predict movement, they are at risk for losses that active managers can avoid, Richardson said. "The basic structure of them ensures that with the failure of any stock, the fund goes over a cliff with the full load," he explained.

At Vanguard, index investing constitutes the core of the firm's tax-efficient investing but is not the sole strategy. According to Ray Amani, director of content solutions at Thomson Wealth Management, Vanguard is at the leading edge of successful tax managers.

"If you look at Vanguard, they have two things: They really track indexes, which traditionally have less activity, and they do a good job with matching their trades, so they don't distribute any kind of gains out to the investor," Amani said.

As for Richardson's criticism of indexing as an investment discipline, Harding countered, "The S&P 500 is a pretty tough bogey for most managers to meet. Even if you're aiming to get that return on an after-tax basis, that's a pretty good goal."

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