Big Tax Bills on the Way for Some Funds

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With about seven weeks to go, the year 2015 is shaping up to be a disappointing one for most investors. So, why are so many mutual funds making sizable capital gains distributions?

The biggest factor is that stocks have been ascendant for the better part of the past six years, so most funds long ago burned through the tax losses that they had on their books. If a manager needs to sell something this year, chances are those securities have appreciated since purchase; that translates into a capital gain upon sale that must, in turn, be distributed to shareholders. If a shareholder owns the fund in a taxable account and has no offsetting losses, taxes are due on the gains.

Of course, funds can sit on highly appreciated securities for a good long time; Morningstar's potential capital gain exposure depicts the percentage of assets that consist of gains that haven't yet been paid out. But if a fund encounters a triggering event, the distributions can come rushing shareholders' way. Some funds are paying out gains for the perfectly innocuous reason that securities hit managers' price targets, so they were sold at a profit; that appears to be the case for several of the American Funds strategies making distributions, for example. For other funds, a manager change--and the ushering in of a new strategy--prompted the sale of profitable positions.

Meanwhile, numerous active funds have been caught up in a vicious cycle: As investors have fled poorly performing funds or gravitated to passive products for simplicity and tax efficiency, managers have had to sell positions to pay off departing shareholders. And if the fund's asset base is shrinking, that magnifies the capital gains pain for investors who stick around.

Around this time of year, mutual fund companies begin publishing estimates of their capital gains distributions. If you own the fund in a taxable account, it's wise to check up on impending distributions. While it's usually not a great idea to pre-emptively sell simply because a distribution is on its way, as discussed here, you still have time to scout around for offsetting losses or other tax maneuvers to lighten your tax load come April 15. And it goes without saying that it doesn't make sense to buy a fund just before it's about to make a big distribution.

While not each and every fund company has published distribution estimates yet, they're beginning to trickle in. We'll update this page on an ongoing basis as firms publish their distribution estimates. Here are some of the highlights thus far.

Although American Funds has stemmed the tide of asset flows--the firm had taken in more than $10 billion in new assets during the 12-month period through September 2015--several of the firm's funds are anticipating meaningful long-term capital gains distributions this season. (As in the past, the firm and others deserves plaudits for helpfully listing capital gains estimates as a percentage of NAV rather than requiring investors to cross-reference the estimated distribution amount with the current NAV.)

(Find the downloadable PDF on distributions on the right-hand side of the page under "Distributions & Yields.")

Calamos Most Calamos funds are neither large nor making capital gains distributions. But Calamos Growth CVGRX deserves a mention here, because the fund is anticipating a total capital gain (both short- and long-term) that amounts to 23% to 25% of its net asset value. Redemptions are likely responsible for much of that payout; the fund's assets once topped $15 billion but now stand at less than $3 billion, as investors have pulled their assets amid erratic, and largely lackluster, performance.

Like Calamos, Columbia Acorn is not a large shop, but the firm is responsible for some of the biggest capital gains distributions coming investors' way in late 2015. As Morningstar director of fund research Russ Kinnel pointed out in this video, redemptions have led to forced selling at the likes of

Capital gains distributions for Dodge & Cox funds are muted for 2015;

Among the Fidelity funds that are anticipating capital gains distributions, many amount to less than 5% of NAV. However, a handful of larger funds will be making more meaningful distributions, including

Franklin Flex Cap Growth FKCGX is expecting one of the larger distributions in the firm's stable, amounting to roughly 14% of its NAV. Franklin Balance Sheet Investment FRBSX is also forecasting a sizable distribution of roughly 12% to 13% of NAV. Franklin MicroCap Value FRMCX is estimating a distribution in the 9% to 10.5% range, while Franklin Biotechnology Discovery FBDIX is anticipating a capital gains payout of between 9% and 11.5% of NAV.

J.P. Morgan JPMorgan US Large Cap Core Plus JLCAX is among the largest J.P. Morgan funds anticipating a sizable capital gains distribution later this year, amounting to roughly 9% of NAV. And while index funds are often touted as more tax-friendly than active, JPMorgan Equity Index OGEAX is demonstrating that that's not always the case; the fund is poised to pay out gains of more than 13% of NAV. JPMorgan Market Expansion Enhanced Index OMEAX is estimating a distribution in the neighborhood of 16% of NAV.

Estimated distributions from various Oakmark funds are quite low.

The only meaningful distributions at the Primecap Odyssey funds will come from

T. Rowe Price had a notably bad year from the standpoint of mutual fund capital gains distributions in 2014; owing largely to manager changes that forced selling, a broad swath of the firm's funds made distributions in excess of 10% of NAV. Early estimates for 2015 aren't nearly so bad, but a handful of funds will be making big payouts. T. Rowe Price Growth and Income PRGIX, which had a manager change earlier this year, is anticipating a distribution of about 14% of its NAV.

T. Rowe Price Science and Technology PRSCX is also anticipating a sizable distribution, composed of both short- and long-term capital gains, in the range of 16% of its most recent NAV. A number of funds were anticipating distributions in the 7% to 9% of NAV range, according to T. Rowe's estimates, including Health Sciences PRHSX (9%, consisting of short- and long-term capital gains),

Among the Vanguard funds anticipating a sizable capital gains distribution later this year is