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Investing Specialists

Big Tax Bills on the Way for Some Funds

We round up the most notable distributions from major firms.

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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. 

American Funds
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.)  Growth Fund of America (AGTHX) is anticipating one of the larger distributions, amounting to between 8% and 10% of assets. Selling brought on by two manager departures contributed to these anticipated gains, notes analyst Alec Lucas. Bradley Vogt, who had been a manager since late 2008, left in May 2015 to take on different duties at Capital, and longtime manager James Rothenberg died unexpectedly in August 2015. Many of their positions, however, would have been absorbed by the fund's other managers, Lucas said. Rothenberg, for example, shared 12 of his top 20 holdings in June 2015 with at least one other manager. It's likely that the expected distribution has as much to do with team members' valuation sensitivities causing them to book gains in long-held names. That seems to be the case with the other American Funds offerings expecting sizable distributions, as none of them saw a named manager depart in 2015.  Investment Company of America (AIVSX) is estimating a distribution of between 7% and 9% of NAV, while  New Economy (ANEFX) and  Smallcap World (SMCWX) are both anticipating distributions in the range of 6% to 9% of NAV. 

AMG Funds (Find the downloadable PDF on distributions on the right-hand side of the page under "Distributions & Yields.")
 AMG Yacktman Focused (YAFFX) anticipates a long-term capital gain distribution amounting to roughly 17% of its recent NAV;  AMG Yacktman (YACKX) is anticipating a distribution in the range of 11% of NAV. Both funds have experienced slumping relative performance, as well as redemptions. 

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. 

Columbia Acorn
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  Columbia Acorn (LACAX), as well as  Columbia Acorn Select (LTFAX) and  Columbia Acorn USA (LAUAX). As a result, the funds are expecting to make distributions of more than 20% later this year. All three funds currently earn Neutral ratings from Morningstar's analyst team, in part because of organizational uncertainty brought on by the departure of Rob Mohn, who had served as lead manager of both Columbia Acorn and Columbia Acorn USA. 

Dodge & Cox
Capital gains distributions for Dodge & Cox funds are muted for 2015;  Dodge & Cox Stock (DODGX) and  Dodge & Cox Balanced (DODBX) are estimating distributions that amount to 3.5% and 2%, respectively, of their current NAVs. 

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  Fidelity Capital Appreciation (FDCAX) (11% of NAV) and  Fidelity New Millennium (FMILX) (10% of NAV as of Sept. 30). Senior analyst Katie Reichart points out that Capital Appreciation has relatively high turnover, while New Millennium has experienced lagging performance and outflows in the past three years. (Both funds earn Bronze Analyst Ratings and have long-tenured managers, however.) Stock Selector Small Cap (FDSCX) and  Fidelity Value (FDVLX) are both anticipating distributions in the 7% range. Among less widely owned funds, Fidelity China Region (FHKCX) will be making one of the larger distributions, amounting to 16% of NAV. 

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.  Franklin Mutual Beacon (TEBIX) expects to make a distribution of between 7% and 8.5% of NAV. By far the largest distribution from the Franklin Templeton family is expected to come from Templeton China World (TCWAX).

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.

 Longleaf Partners (LLPFX) paid out a distribution amounting to roughly 13% of its NAV on Nov. 12, 2015. A note on the firm's website says that the distribution is 90% attributable to capital gains generated in 2014. The fund's performance has been abysmal, and shareholders have voted with their feet. 

Estimated distributions from various Oakmark funds are quite low.  Oakmark Equity & Income (OAKBX) is making one of the firm's largest distributions, but it's still less than 5% of NAV.

Primecap Odyssey
The only meaningful distributions at the Primecap Odyssey funds will come from  Primecap Odyssey Aggressive Growth (POAGX), estimating a distribution of roughly 7% of NAV. 

T. Rowe Price
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.  Small-Cap Value (PRSVX) is anticipating a distribution of $7 per share, or 15% of its recent NAV; senior analyst Katie Reichart says that likely relates to portfolio changes in the wake of the 2014 departure of longtime manager Preston Athey. "Athey was such a longtime holder of many of the fund's stocks and many had long-term embedded gains, so I'm not surprised there are still some tax consequences at this point as new manager David Wagner continues to reposition," she said. 

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),  Small-Cap Stock (OTCFX) (8%),  Mid-Cap Value (TRMCX) (8.5%),  Mid-Cap Growth (RPMGX) (8%),  Capital Appreciation (PRWCX) (7%), and  New America Growth (PRWAX) (7%). Reichart points out that all but New America Growth are closed to new investors, so it's far easier for money to leave than to come in. She adds that T. Rowe's moderate approach has likely triggered some manager selling, too. "Some of those managers would say that after a mostly up market these past six years, it's just inevitable to have some tax consequences at some point," she said.

Among the Vanguard funds anticipating a sizable capital gains distribution later this year is  Vanguard Explorer (VEXPX); the firm is expecting a roughly 9% distribution (as a percentage of NAV) from the fund, which also made a sizable distribution in 2014.  Vanguard Strategic Equity (VSEQX) is anticipating a distribution in that same ballpark of 9% of NAV.  Vanguard Capital Value (VCVLX) and  Vanguard U.S. Growth (VWUSX) expect to make capital gains distributions that amount to roughly 8% of their NAVs, while Diversified Equity (VDEQX),  Mid-Cap Growth (VMGRX), and  Morgan Growth (VMRGX) are each forecasting distributions in the 7% range.

Christine Benz has a position in the following securities mentioned above: OTCFX. Find out about Morningstar’s editorial policies.