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These Funds Are Set to Make Hefty Taxable Distributions

It looks to be a fairly quiet year for capital gains payouts, but a few funds stand out.

Greg Carlson, 12/10/2012

It’s that time of year again, when mutual funds distribute taxable capital gains to shareholders. Some smaller firms have already made distributions, but most will pay their gains out in the last few weeks of December. If you’re considering buying a fund in a taxable account, you’ll want to keep an eye out for big upcoming distributions. It makes more sense to wait until after the payout occurs. Otherwise, you’ll face a tax bill for gains the fund enjoyed that you weren’t around to receive.

The good news is that after poring over the distribution estimates of roughly 1,000 mutual funds (including most of the largest U.S.-sold offerings), we can report that relatively few of them are making hefty distributions this year. We found no funds from Vanguard, T. Rowe Price, or American Funds, for example, that estimated they would make taxable distributions in December that were equal to or exceeded 10% of their net asset values as of Dec. 3, 2012. 

The relative dearth of big distributions makes some sense: Although the stock market has essentially doubled from the March 2009 bottom, much of that rise took place in 2009. True, equities have generated healthy gains in 2012 through Dec. 5; the S&P 500 and the MSCI EAFE Index have gained 14% and 15%, respectively. But 2011 was flat to negative for many major stock indexes, so funds didn’t necessarily have big embedded gains coming into 2012.

The Ones to Look Out For
Each of the funds in the table below has estimated end-of-the-year distributions that will exceed, or come very close to, 10% of their NAVs as of Dec. 4, 2012. These distributions are primarily long-term capital gains, which are currently taxed at 15%, but also include short-term gains and income that are taxed at investors’ marginal income tax rates. (Check your fund’s website for the distribution breakdown.) We’ve included the record date for each fund because only shareholders who own the fund on that date will receive the distributions (which are usually paid out one to two business days later). Note that the dollar amount that’s being paid out per share is less indicative of your potential tax bill than the percentage of the NAV it represents. Fidelity Select Chemicals FSCHX, for example, is slated to make a distribution of $3.51 per share in late December, but that’s only a hair above 3% of the fund’s recent NAV of $115.23.

Nearly half of the 15 funds listed have seen sizable outflows in 2012. Outflows can raise per-share distributions, because realized gains are then spread over a smaller number of shares. The two funds managed by Tom Marsico and his team have seen performance and organizational issues in recent years; each has lost more than a fourth of its assets to outflows in 2012 and more than half their assets have been yanked by investors in the trailing three years through November 2012. Another fund on the list, Columbia Value & Restructuring EVRAX, saw the retirement of longtime lead manager David Williams in April and has lost half its assets to outflows just this year. And its sibling, Columbia Select Small Cap ESCAX, has seen big outflows as it’s struggled, spurring a particularly large estimated distribution this year. Bridgeway Ultra-Small Company Market BRSIXJPMorgan US Real Estate SUSIX, and PIMCO Real Return Asset PRAIX have also seen substantial outflows in 2012.

Loosening Restrictions--For Now
While we do not recommend ditching any specific funds for tax reasons (that’s best decided by individuals who know their own tax situations), two fund companies are making it easier to do so over the near term. Both American Funds and Davis Advisors are suspending policies that restrict trading of their funds. The Bush-era tax cuts that reduced the long-term capital gains tax rate from 20% to 15% are set to expire at the end of 2012. Thus, the firms expect some investors to realize gains this year. Both say they’ll continue to closely monitor activity to deter the type of rapid trading that caused many firms to enact such policies in the wake of the 2003 market-timing scandals. (Neither firm was involved in those scandals.) 

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Greg Carlson is a fund analyst with Morningstar.

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