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Caution: Tax Bills Ahead

A survey of this season's capital gains distribution estimates.

Dan Culloton and Greg Carlson, 11/21/2013

At Vanguard, currently the largest fund family, Vanguard Explorer VEXPXVanguard Capital Value VCVLX, and Vanguard Mid Cap Growth VMGRX will make the biggest gains in the family as a percentage of net asset value--about 10% each. Vanguard Explorer, an actively managed subadvised fund, has seen steady outflows since 2006 while posting decent gains. Nearly half the fund's assets represent gains, and it has continued to see outflows this year through October, so a healthy distribution is no surprise here. Vanguard Capital Value is an aggressive, high-turnover contrarian fund that has soared a cumulative 325% from the March 2009 financial crisis nadir through Nov. 19, 2013, more than enough to burn through the losses it realized in a difficult 2007 and 2008. Vanguard Mid Cap Growth has seen modest inflows this year, but it also has an above-average turnover rate and is sitting on a fair amount of gains. 

The biggest estimated capital gains distributions at Fidelity Investments include Fidelity Latin America FLATX, which will distribute a gain of about 17% of its NAV. Fidelity Trend FTRNX and Fidelity China Region FHKCX each will distribute capital gains amounting to more than 11% of their NAVs. About 20 other Fidelity funds will distribute gains amounting to 5% to 10% of NAV, including Fidelity Capital Appreciation FDCAX (9%), Fidelity Mid Cap Value FSMVX (8%), Fidelity ContrafundFCNTX (6%), Fidelity Magellan FMAGX (5%), and Fidelity New Millennium FMILX(5%). Nearly half of Fidelity Capital Appreciation's distribution and more than 40% of Fidelity Magellan's payout will be short-term gains, which are taxed at a higher rate.

At American Funds, the biggest distribution estimates come from American Funds AMCAP AMCPXAmerican Funds Growth Fund of America AGTHX, and American Funds SMALLCAP World SMCWX which all report that they will pay out distributions of 5% to 8% of their NAVs. American Funds Investment Company of America'sAIVSX distribution could approach 9% of NAV, according to estimates. Many American Funds have endured outflows in recent years. Growth Fund of America and Investment Company of America saw another $8 billion and $4 billion leave, respectively, in the first 10 months of 2013. But managers at the family contend that outflows have not forced them to realize the gains; rather, after four years of generally rising equity markets, the funds have little if any realized and unrealized losses that can be used to offset the gains.

Going With the Outflows
Persistent redemptions appear to have influenced Calamos Growth's CVGRXestimated distributions. For the third year in a row, it looks like the fund will issue a big distribution, this one amounting to nearly 25% NAV. Inves­tors pulled a net $2.4 billion from Calamos Growth through October 2013 (40% of its total assets at the start of the year), and the fund has gained 26% for the year through Nov. 1. It made capital gains distributions equal to 5% and 8% of its net asset value in 2011 and 2012, respectively. Continued outflows in 2014 could spell more tax bills.

At first glance, Royce Low-Priced Stock RYLPX doesn't appear primed to make a big distribution. It has struggled since the start of 2011, registering a slight loss from then through Nov. 19, 2013, while its typical peer has gained an annualized 14%. The fund also trades fairly infrequently; portfolio turnover has aver­aged 23% annually over the past five years. But Royce estimated in mid-September 2013 that the fund would make a distribution equal to 16.6% of its NAV to those who own the fund in a taxable account as of Dec. 4. Investors have pulled a net of $2.6 billion from the fund since the start of 2011, which means its realized gains are spread over a far smaller asset base ($1.7 billion).

Domino Effects
Some of the biggest distributions as a percentage of net assets will come from funds that recently got new managers and/or strategies. Such changes can lead to big gains distributions as new skippers reposition portfolios to their liking. Lord Abbett Classic Stock LRLCX, for example, got new managers in June and estimates it will pay out almost 30% of its NAV next month. Lord Abbett Small Cap ValueLRSCX, where Tom Maher and Justin Maurer took over on Oct. 1, could hand out distributions amounting to 20% to 24% of NAV.

BlackRock has remade several of its equity funds in the past year or so, too, with many of them due to issue large gains this year. BlackRock Capital AppreciationMDFGX, where Lawrence Kemp took over at the start of the year, will issue gains of between 13.69% and 14.90% of NAV, but most of it long-term gains. Kemp's team also took over and revamped BlackRock Mid-Cap Growth Equity BMGAX, which will distribute between 15.65% and 17.41% of NAV. BlackRock's Scientific Active Equity team took over BlackRock Small Cap Growth Equity CSGEX in May and transformed it from a bottom-up stock-picker's fund into a broader quant offering that, at least while the transition was underway, traded more often. It will issue a distribution of 28.15% to 29.48% of NAV. BlackRock US Opportunities BMEAX, which also got new lead managers in 2013, put its potential distribution between 19.73% and 20.62% of NAV, and about one third of those gains could be short term. Bart Geer came over from Putnam Investments late in 2012 to run BlackRock Basic Value MDBAX, but has reaped enough gains in 2013, his first full year at the helm here, to make an estimated distribution of between 12.19% and 13.41% of NAV.

Dan Culloton is an associate director of fund analysis for Morningstar and editor of Morningstar's Vanguard Fund Family Report, a monthly newsletter that offers independent, no-holds-barred guidance on the pros and cons of this dominant fund family. Click here for a free issue of the Vanguard Fund Family Report.

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