Same evergreen fund, same fees, two share classes. The accumulating version wins only through tax deferral, and only in regimes that allow it.
Only where the investor's tax regime lets income build up untaxed inside the fund. Then the accumulating class compounds at the full pre-tax return and pays tax once, on redemption. On an illustrative 100 held ten years in an evergreen fund returning 8 per cent, 5 points of it income, both taxed at 30 per cent, the accumulating class nets 181.1 against 175.6 for the distributing class with distributions reinvested: 5.6 more, or 33 basis points a year. Where accumulated income is taxed as if distributed, the gain is nil.
Worked in full in The Evergreen Fund Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Many semi-liquid private markets funds offer both versions of each share class: one that pays out the portfolio's income and one that keeps it in the NAV. Fees and the portfolio are identical. The difference is when the investor pays tax, and that is a calculation, not a preference.
| Input | Value |
|---|---|
| Amount invested | 100 |
| Income return, a year, net of fees | 5% |
| Capital growth, a year | 3% |
| Total return, a year | 8% |
| Tax on distributions, paid in the year | 30% |
| Tax on gains, paid on redemption | 30% |
| Holding period, years | 10 |
The distributing investor reinvests each distribution after tax, through the fund's reinvestment plan, so both investors stay fully invested and only the timing of tax differs. The tax rates are not those of any particular country; they are set equal first so that the result isolates deferral. This illustrates the mechanics only and is not tax advice: how each class is taxed depends on the investor's jurisdiction and circumstances and on the fund's structure.
Value after 10 years = 100 × 1.0810 = 215.9
Tax on redemption = 30% × (215.9 − 100) = 34.8; net 181.1
Annualised after tax: 6.12 per cent. In Excel: =100*(1+B2)^B3*(1-B4)+100*B4, with the total return in B2, years in B3 and the tax rate in B4.
Growth after tax = 3% + 5% × (1 − 30%) = 6.5% a year; value after 10 years = 187.7
Tax base = 100 + reinvested distributions = 147.2; tax on redemption = 30% × (187.7 − 147.2) = 12.1; net 175.6
Tax on distributions over the ten years: 20.2. Annualised after tax: 5.79 per cent. Reinvested distributions buy units at NAV and add to the tax base, so they are not taxed twice.
| Class | Value before exit tax | Total tax | Net | Annualised |
|---|---|---|---|---|
| Accumulating | 215.9 | 34.8 | 181.1 | 6.12% |
| Distributing, reinvested | 187.7 | 32.4 | 175.6 | 5.79% |
| Difference | 5.6 | 33 bps |
The accumulating investor pays more tax in total, 34.8 against 32.4, and still ends with more. Nothing was saved in tax: the gain is the return earned on tax not yet paid, which stays invested for up to ten years.
The fund's own investors are not affected either way. Both classes hold the same units of the same portfolio and pay the same fees; the only flows between them are the reinvested distributions, which buy units at NAV like any other subscription. The choice is the investor's, and it is a tax choice.
| Case | Accumulating | Distributing | Advantage | A year |
|---|---|---|---|---|
| Held 5 years | 132.9 | 131.9 | 1.0 | 15 bps |
| Held 10 years, base case | 181.1 | 175.6 | 5.6 | 33 bps |
| Held 20 years | 356.3 | 317.4 | 38.8 | 61 bps |
| Gains taxed at 20% | 192.7 | 179.6 | 13.1 | 75 bps |
| Credit fund: 8% income, no growth | 181.1 | 172.4 | 8.7 | 52 bps |
Deferral compounds, so the advantage grows faster than the holding period. It more than doubles where gains are taxed below income, because the accumulating class turns the fund's income into a gain on redemption. At equal tax rates it is also larger for a private credit evergreen fund, where almost all the return is income: the more of the return that is distributed, the more the share class choice matters.
The distributing class has one advantage the arithmetic above ignores. A distribution is paid to everyone in full; a redemption from a gated fund is not. An investor who holds the accumulating class and redeems a little each quarter to create income joins the queue, and in a quarter where requests run at 3x the cap gets 33.3 per cent of what was asked. If the money is needed as income, the distributing class delivers it without touching the gate.
Two of them. The first is comparing the two classes before exit tax: 215.9 against 187.7 makes the accumulating class look 28.2 better, five times the real 5.6, because the accumulating NAV carries a deferred tax bill of 34.8. The second is assuming the deferral exists. Several regimes tax accumulated income as if it had been paid out: some tax investors on income the fund reports whether or not it is distributed, others apply deemed-income rules. There the accumulating class produces the distributing column's 175.6, with the tax paid from other cash. The investor's adviser has to answer this, not the fund. How a reinvestment plan affects the other investors is set out in what share of an evergreen fund's inflows a DRIP provides, and why a distribution rate is not a return in this companion piece.
Where income can build up untaxed, the accumulating class adds about 33 basis points a year over ten years in this case, more for income-heavy funds and long holds. Where it cannot, or where the investor needs the cash, the distributing class costs nothing and avoids the redemption queue. The Evergreen Fund Handbook treats share classes as a fairness question, class by class, and the free workbook and working documents for the book compute what each class costs.
Not necessarily less, but later. In the illustrative case the accumulating investor pays 34.8 of tax in total against 32.4 for the distributing investor, yet ends with 181.1 against 175.6, because the deferred tax stays invested for ten years. Where gains are taxed at 20 per cent and income at 30, it also pays less.
In some regimes, yes. Some tax investors on income a fund reports whether or not it is paid out, and others apply deemed-income or deemed-distribution rules. There the accumulating class gives no deferral and produces the distributing result, 175.6 per 100 in the illustrative case, with tax paid from other cash. The treatment depends on the investor's jurisdiction and status and the fund's structure.
Often the distributing class, for liquidity rather than tax reasons. Distributions are paid in full, while redemptions from a gated fund are prorated: with requests at 3x the quarterly cap, each investor receives 33.3 per cent of the amount asked. Creating income by redeeming accumulating units puts the investor in that queue.
This article is one calculation from The Evergreen Fund Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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