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Fund Spy

Will Fund Investors Finally Get Tax Relief?

Bill would exempt $3,000 of capital gains taxes.

While the SEC takes steps toward putting fund investors on equal footing with stock investors when it comes to disclosure of key information, Congress is considering righting a wrong in the tax code.

Stock investors only pay capital gains taxes when they sell shares, but fund investors have to pay taxes on paper gains even before they sell any shares of their fund. The way it currently works is that funds have to distribute any realized capital gains once a year to all shareholders regardless of when the shareholders bought the fund and whether or not they have actually enjoyed any capital appreciation. It’s a dated and overly complex rule that makes April 15 a headache even for long-term investors who don’t trade their accounts.

Last week, the Joint Economic Committee, a panel of House and Senate members, published a report calling for individual investors to be given a $3,000 tax break on realized fund gains and couples to receive a $6,000 break, according to I’d rather see fund gains simply treated like stock gains so that you pay taxes when you sell your investment at a profit. Nonetheless, this would be a big step in the right direction.

Will this proposal pass or was this just a way to get some publicity on tax day? I’m not sure, but the odds probably aren’t running in its favor. I also know that this issue gets fund investors’ blood up more than just about anything else. It’s a pain and it’s not fair. In the past, I’ve taken polls in my column and found a huge percentage of readers think there should be equality in the tax code for stock and fund investors alike. If you’re annoyed by it, send your congressional representative an e-mail or give him or her a call.

Dawn of the Dead?
How scary is this? The Wall Street Journal reports that  Jacob Internet (JAMFX) is “Back on Top,” and’s summary of the story even said “Jacob Internet’s Comeback Complete.” Zoinks! In the spirit of equality between stock and fund investors, there should be some way we can buy shares of Enron, too. If you want to walk back into the same bear trap that you got caught in before, let's have equal opportunity.

The reason Jacob appears to be back on top is that the fund’s three-year returns are the best in the tech category. However, if you go back to the fund’s inception at the end of 1999, you get a different picture. A $10,000 investment in Jacob Internet on January 1, 2000, would have been worth a mere $1,842 at the end of March 31, 2004. That’s a complete comeback?

The Wall Street Journal also reports that "Mr. Jacob is picking stocks as carefully as ever now." That's a relief.

The Agony of Value
Regular readers of Fund Spy know that I believe managers have to be willing to stick their necks out and risk looking foolish if they want to beat the market. So, I offer up the following example as evidence of how unpleasant that can feel, not because I think Wally Weitz is a bad investor.

A year ago, Weitz got burned when it turned out the Rigas family was allegedly using Adelphia Communications as their personal kitty. (The Rigas’ trial is actually under way right now. Click hereto read some of The Wall Street Journal’s excellent coverage.)

Then last week,  Weitz Hickory  (WEHIX) and  Weitz Value (WVALX) got singed when the Journal revealed that  Novastar Financial  (NFI) had been barred from lending in some states and that some of the branches it claimed to have were nonexistent. The stock was crushed in reaction. The funds had only about a 2% position in Novastar, so it wasn’t a big disaster, but still it’s embarrassing for a manager with as great a record as Weitz’s. On the other hand, it could turn out that this is much ado about nothing as Novastar arguesand it will turn into another success story for the funds.

Your Opinion on a Hard Close
Last week, I asked your opinion on how the SEC should combat late trading and this is how you voted:

The vast majority (70%) voted for this approach: Use a hard close in which everyone has to get their orders into the fund companies by 4 p.m. Eastern time. The next most popular option (25%) was to require a hard close except for the firms that can verify the time of the order with an indelible time stamp. A little less than 4% said leave the system as is, and just 2% said we should wait until everyone is ready with time-stamp technology. In other words, 95% of you said the SEC should take action now to stop late trading and forget the convenience issues.

Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.