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While the downturn of 2008 devastated mutual funds, there was one side benefit, albeit a perverse one: Investors had little reason to worry about capital gains at tax time. Now that the bull market is in its third year, many funds are again stockpiling capital gains. Those can generate unexpected tax bills and cause investors — your clients — to hit the roof.

To dampen capital gains taxes, there are many legal techniques advisors may use. Common strategies include using ETFs, tax-managed mutual funds, or low turnover strategies. But none of these approaches is foolproof. In some cases it can be counterproductive to follow the traditional rules of thumb. “There is no single reliable indicator of what tax efficiency will be going forward,” says Joel Dickson, a senior investment strategist for Vanguard Group.

To develop a tax strategy, it is necessary to study data on past performance and make a subjective judgment about how funds will fare in the future. That isn’t easy. To appreciate how difficult tax management can be, consider the old rules of thumb listed below and how they often fail.

Low Turnover

Every time a fund sells stock at a profit, it can generate capital gains tax bills that must be paid by shareholders. To limit gains, there appears to be a simple solution: Don’t trade. So many advisors aim to reduce taxes by holding low-turnover funds. But this strategy can fail.

Consider Franklin Rising Dividends (FRDPX), which has a tiny annual portfolio turnover rate of 6 percent, and Janus Contrarian (JSVAX), with a turnover of 104 percent. Both funds are top performers in the large blend category. During the past 10 years ending in May, Franklin returned 6.1 percent annually, outdoing 97 percent of competitors, while Janus returned 5.9 percent, according to Morningstar. But Janus was much more tax-efficient. After taxes, Janus returned 5.5 percent, compared to 4.8 percent for Franklin.

The reason? The different strategies of the funds. Franklin invests in dividend-paying blue chips, while Janus aims to scoop up unloved stocks of all sizes. Franklin’s blue chips produce dividend income, which is taxable. Janus is more tax-efficient partly because many of its holdings pay no dividends. In addition, Janus is an erratic performer, often sinking sharply in downturns. The periodic declines generate capital losses, which can be used to offset gains. In contrast, Franklin is a steady performer, outpacing competitors in downturns. As a result, Franklin has relatively few capital losses. Which fund will be more tax-efficient in the coming decade? That’s hard to know.

ETFs

These can be more tax-efficient than mutual funds, but it doesn’t always work out that way. Compare Vanguard 500 Index (VFINX), an S&P 500 index mutual fund, with two similar ETFs, iShares S&P 500 (IVV) and SPDR S&P 500 (SPY). During the past decade, the Vanguard fund returned 2.54 percent annually, lagging iShares, which returned 2.60 percent, and SPDR, with a return of 2.57 percent. But the Vanguard mutual fund was the most tax-efficient. After taxes, Vanguard returned 2.18 percent, compared to 2.12 percent for iShares and 2.04 percent for SPDR.

Vanguard excelled partly because the mutual fund manages its assets in a way that is designed to book losses. To avoid recording gains when selling, the portfolio manager searches for stock to sell stock at a loss. This results in a loss that can offset gains. ETFs don’t have the flexibility to book losses.

Tax-Managed Funds

Some funds advertise the fact that they are managed with an eye on tax efficiency. The tax-managed funds make pains to harvest capital losses. But it is not always clear that tax-managed funds are the best choices. Consider Eaton Vance Tax-Managed Value (EATVX) and Eaton Vance Large-Cap Value (EHSTX), a conventional fund. Both funds have the same manager and similar returns. During the past 10 years, Eaton Vance Large-Cap Value returned 3.97 percent annually, outdoing 63 percent of competitors, while the tax-managed fund returned 3.64 percent.

By some measures, the tax-managed fund was more tax-efficient. High-income investors in the tax-managed fund only lost 0.27 percent of their returns to taxes, while investors in the other fund lost 0.50 percent to the Feds. But the tax advantage did not fully compensate for the superior returns of the conventional fund. After taxes, the tax-managed fund returned 2.75 percent, lagging the conventional fund, which returned 2.83 percent. In the end, neither fund is a clear winner. But many investors will prefer sticking with conventional funds when they deliver the best after-tax returns — and not the choices that simply generate the smallest tax bill.