These Funds Offer You a Break on Taxes

We fund investors get the short end of the stick on taxes. Buy a stock and you don't owe taxes until you sell it for a profit. Buy a fund and you could pay taxes long before you sell it. However, one benefit of last year's losses is that funds now have big losses on their books that largely negate that disadvantage.

Many funds have negative capital gains exposure of more than 50%. That means that they would have to appreciate about 50% before they start distributing capital gains. (Technically, it varies based on flows and how tax-savvy the managers are.) Thus, for a change, someone starting out a fund portfolio today has a major advantage over someone beginning a stock portfolio.

Today, most stock funds in the Morningstar 500 have negative potential capital gains exposure of between 10% and 50%, but there are some good ones with even more. The highest of all is Fidelity Select Electronics FSELX, with a negative PCGE of 509%.

There are so many good funds that I'll touch briefly on a bunch that jump out.

Harbor International Growth HIIGX has one of the biggest negative PCGEs (-113%) because performance was weak under previous management. Last year wasn't great for Jim Gendelman of subadvisor Marsico, but his track record is strong, and I like managers who seek out companies that can still grow (or shrink more slowly) in a global recession.

Oakmark International Small Cap OAKEX (-146%) is a deep value gem. You've got to get in funds like this when the style is out of favor. It will be a bumpy ride, so consider buying a starting position today and building up more over the next couple of years.

T. Rowe Price Global Stock PRGSX (-28%) is a small fund with a great manager. Rob Gensler did a great job at the funds that he ran before taking this one over, and I like giving him free rein to invest around the globe.

Vanguard Explorer VEXPX (-78%) isn't the most exciting small-cap fund, but it has superlow costs and strong managers. The fund has consistently beaten its peers and benchmark.PAGEBREAK