Earlier this week, the Wall Street Journal (WSJ) observed a problem that our readers have long known: mutual funds have a major structural flaw that exposes shareholders to unwanted and unnecessary tax liabilities. Moreover, this flaw should be of acute interest to anybody anywhere that owns a mutual fund – even ones that purport to be “tax-efficient” – inside a taxable investment account.

As the WSJ keenly observed, the Oak Ridge Small Cap Growth Fund (Nasdaq: ORIGX) is a case study in how the problem of poor investment returns can compound into a tax nightmare for mutual fund shareholders that are left holding the bag.

Classified in the small cap growth category, the Oak Ridge Small Cap Growth Fund underperformed the Russell 2000 Growth Index and ETFs linked this index  (IWO) six out of eight years from 2009 to 2016.

The raw underperformance of ORIGX not just against its peer group, but against peer small cap growth benchmarks is alarming. During the past 10 years*, IWO has gained +165.58% while ORIGX lagged with a gain of just +107.77%.

Instead of being rewarded for having a long-term view, fund shareholders that have decided to hang onto ORIGX, hoping for a rebound,  have instead been badly damaged by exiting shareholders. Here’s what’s occurred: As exiting shareholders redeems their fund shares, ORIGX’s portfolio managers have in turn been forced to liquidate or sell holdings to pay off these redeeming shareholders. But wait, that’s not all. Remaining fund shareholders get stuck with the tax bill for all of these portfolio liquidations, plus the transaction cost of these sales. How bad will it be?

Remaining ORIGX shareholders will be receiving their form 1099-DIV toward the end of January and it just might trigger a heart attack in some. Around 60% ($22.77) of the fund’s Dec. 12th net asset value was distributed in the form of capital gains. Form 1099-DIV is sent by mutual funds to report capital gains, dividends, and interest income that are received and paid to investors who hold their fund shares in non-retirement accounts.