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Fund Times

Last Year's Losses Easing This Year's Capital Gains Distributions

Also, Bogle Small Cap Growth reopens, Peltz joins Legg Mason board, and more.

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It's capital gains season, but despite this year's strong rally there still may not be many gains for funds to distribute. Heading into the final months of 2009, many mutual fund companies have either announced or are preparing to announce their funds' estimated capital gains distributions for the year. Dodge & Cox, Longleaf, and Baron Funds have said that they don't expect any capital gains distributions this year, and Osterweis has indicated that it expects minimal, if any, capital gains distributions for 2009.  T. Rowe Price (TROW) also released its estimates, and the firm expects only a few funds to pay out small capital gains distributions. Fidelity's announcement also indicated very few capital gains distributions. This is in sharp contrast to last year, when many funds distributed gains realized in the runup to the bear market while the market was plunging. This year many funds are using severe losses sustained in 2008 to offset more recent gains. Funds can use those losses to offset future gains for as many as eight years. So, an upside to last year's debacle is that a lot of funds should be more tax-efficient in coming years.

Morningstar calculates funds' potential capital gains exposure on a monthly basis (click here for more details). PCGE estimates the percentage of a fund's holdings that represent gains, and it serves as a guideline for investors regarding the likely tax costs of investing in a fund. When considered with other factors, such as turnover and strategy, PCGE can help identify funds that might make big capital gains distributions in the future.

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