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Investing Specialists

A Rundown of Impending Mutual Fund Capital Gains Distributions

Which funds--and fund families--are dishing out big taxable distributions this year?

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Despite the U.S. stock market's multiyear run--thus far extended into 2016--equity mutual funds aren't making sizable capital gains distributions across the board later this year. But there are a handful of doozies.

Funds must pay out any capital gains they've realized during the past year to their shareholders; those distributions typically occur toward the end of each calendar year. For investors in IRAs and other tax-preferenced vehicles, those distributed gains are a non-event if they're reinvested. But for investors in taxable accounts, those gains can add up to a tax bite, even if the investor is newly arrived in the fund, is reinvesting the gains, and/or hasn't sold a share.

A convergence of factors has prompted outsized capital gains distributions at some funds in recent years. First and foremost is that the U.S. stock market has risen quite steadily since 2009, meaning that most funds' holdings have appreciated since purchase. If a manager sells out of some of those positions to swap into a more attractive holding or to meet shareholder redemptions, that will probably unlock a gain.

Investor preferences also explain some of the distributions, as investors have been opting for exchange-traded funds and index funds while dumping actively managed options. Those outflows have forced some active fund managers to sell stocks to pay off departing shareholders; not only does that lead to distributed capital gains, but it means that those capital gains payouts must be spread over a smaller group of shareholders than in the past.

What to do if you hold a fund in a taxable account and see a big capital gain coming your way? First, remember that selling preemptively--before the fund makes a distribution--may not work to your advantage. If the holding has appreciated since you purchased it, you're going to unlock your own capital gain by selling. Thus, you might dodge the fund's distribution but trigger you own tax bill. On the other hand, if a fund has been a serial distributor of capital gains, remember that you have "prepaid" some of your taxes because you were able to step up your cost basis to account for the reinvested distributions that you've already paid taxes on. Thus, selling now and undertaking a tax-efficient makeover may be less painful than you think. As I've argued before, given taxable capital gains distributions from so many active funds, it's hard to make a case for owning such offerings inside of a taxable account; index funds and ETFs, as well as tax-managed funds, provide an investor with tighter control over capital gains distributions. 

To help keep you abreast of the estimated capital gains distributions coming down the pike, we've compiled estimated gains information from a number of big mutual fund shops. 

It's also important to note that while most mutual fund companies attempt to forecast their distributions as a service to shareholders, they're only estimates; a fund's actual distributions could be higher or lower depending on manager buying and selling, changes in assets under management, and so on. Check your fund company's website for the most currently available information, and seek guidance from an accountant before engineering any big changes in anticipation of capital gains distributions.

American Funds 
Although American saw dramatic asset outflows in the early part of the current bull market, outflows at the firm's funds have slowed of late. Thus, it's not surprising that the firm wasn't anticipating any very large capital gains distributions when it published its estimates in mid-September. Most of the equity funds are estimating gains that amount to less than 3% of their net asset values.  American Funds Growth Fund of America (AGTHX) is making a slightly higher distribution than its siblings; as of mid-September 2016, the fund was estimating a long-term capital gains distribution that amounted to 5% to 7% of its NAV. 

As of late September, a handful of AMG funds were estimating decent-sized capital gains distributions later this year. For example, the Silver-rated  AMG Yacktman Focused (YAFFX) was expecting to pay out a distribution of nearly 9% of its NAV; sibling  AMG Yacktman (YACKX), which earns a Gold rating, is forecasting a smaller distribution of 6% of its NAV. Both funds have soared recently, but they've experienced asset outflows following longtime comanager Don Yacktman's retirement from day-to-day management and stretches of lackluster returns from 2012 through 2015. The Bronze-rated  AMG Managers Montag & Caldwell Growth (MCGFX) is also forecasting a meaningful distribution; as of late September, AMG was estimating a capital gains payout of just under 9% of NAV. Performance at the fund has lagged and its asset base has shrunk. 

Funds in the Ariel lineup will be making capital gains distributions on Nov. 17, ahead of many other mutual funds. As of the end of September,  Ariel Fund (ARGFX) is anticipating a distribution that amounts to about 6.6% of its early-November NAV, while  Ariel Appreciation (CAAPX) is expecting to pay out about 6.5% of its current NAV.

Columbia Acorn
This firm's funds were some of the largest distributors of capital gains in 2015, and they earn that ignominious honor again this year. As of the end of September,  Columbia Acorn (ACRNX) was forecasting a distribution of 20%-25% of its NAV. Sibling Columbia Acorn USA (AUSAX) was estimating a distribution in a similar ballpark of 23%-25% of NAV. Columbia Acorn Select (ACTWX) was anticipating a roughly 10%-11% distribution. Manager changes have prompted dramatic outflows from the funds; those, in turn, have prompted high distributions.

Fidelity's equity funds look pretty tame this capital gains season; as of September-end, many of the largest equity funds in the family were anticipating modest distributions or none at all. Silver-rated  Fidelity Contrafund (FCNTX), for example, is forecasting a distribution of less than 2.5% of its September-end NAV. Yet there were a few outliers. Bronze-rated  Fidelity Leveraged Company Stock (FLVCX), for example, is forecasting a distribution that amounts nearly 13% of its September-end NAV; the feast-or-famine fund is in the midst of a rough performance patch.  Fidelity Value Strategies (FSLSX), meanwhile, expects to dish out more than 11% of its NAV amid weak recent returns and a manager change; it earns a Neutral rating currently.  Fidelity Independence (FDFFX), also Neutral-rated, is forecasting a distribution amounting to just over 6% of its NAV. Most of the Fidelity funds making distributions will do so in mid- or late December.

Franklin Templeton
Franklin Templeton earns plaudits for providing an an easy-to-scan display of its funds' impending capital gains distributions in percentage terms. As of Sept. 30, the largest distributions were coming from the firm's small- and mid-cap value lineup. Franklin Balance Sheet Investment (FRBSX), a mid-cap value fund, was anticipating a distribution of between 5% and 8% of NAV, while Franklin MicroCap Value (FRMCX), a small-value fund, was forecasting a 7%-11% distribution. Franklin Small Cap Value (FRVLX) was estimating a distribution in the 3%-6% range; Franklin Small Cap Growth (FSGRX) was forecasting a distribution of 3%-8% of NAV. These distributions are scheduled for Dec. 14.

JP Morgan
One of the biggest surprises among JP Morgan's capital gain estimates is the more than 9% long-term capital gains estimate for the firm's S&P 500 index tracker, Equity Index (OGEAX), following on the heels of a large distribution last year. Whereas broad-market index funds have historically been quite tax-efficient thanks to their low-turnover nature, this fund has been anything but. The firm's Bronze-rated  Large Cap Growth (OLGAX) fund is also forecasting a sizable distribution amounting to 8% of its NAV. Gold-rated  Mid Cap Value (JAMCX), closed to new investors, is anticipating a distribution of 6% of its NAV. In general, closed funds are more susceptible to capital gains distributions because such funds' outflows are typically greater than inflows. Thus, their managers do more selling than buying.

After several years' worth of high capital gains distributions,  Longleaf Partners (LLPFX) is anticipating a modest long-term capital gains distribution for 2016, amounting to just 2% of its assets. Yet the firm's closed  Small-Cap (LLSCX) fund, which earns a Silver rating, will pick up where Partners left off; amid a streak of impressive performance, the fund is anticipating a distribution of 16% of its NAV. The firm will make distributions in mid-November. 

Morgan Stanley
The biggest capital gains shocker in the Morgan Stanley fund lineup comes from  Morgan Stanley Institutional Mid Cap Growth (MPEGX), which is forecasting a distribution of 25% of its NAV. The Silver-rated fund has experienced weak performance and asset outflows in recent years following a stellar stretch in 2009 and 2010.

Primecap Odyssey
The only meaningful distribution in the lineup is coming from the closed  PRIMECAP Odyssey Aggressive Growth (POAGX). As of late September, the Gold-rated mid-growth fund was estimating a long-term capital gains distribution that amounts to roughly 9% of its NAV; capital gains distributions from its siblings are expected to be modest. The funds pay out gains in mid-December.

T. Rowe Price
The biggest distribution in the T. Rowe stable is coming from the Bronze-rated  T. Rowe Price Growth & Income (PRGIX); it's anticipating a distribution that amounts to 17% of its current NAV.  T. Rowe Price Equity Income (PRFDX) is forecasting a distribution that amounts to 5% of its current NAV; ditto for  T. Rowe Price New America Growth (PRWAX). The funds will distribute gains in mid-December.

Vanguard released its preliminary capital gains estimates on Nov. 10. Among widely held Vanguard funds,  Vanguard Windsor II (VWNFX) is anticipating one of the larger distributions, amounting to roughly 5.8% of its current NAV. The closed  Capital Opportunity (VHCOX), managed by Primecap, is estimating a distribution that amounts to 5.3% of its current NAV.  Vanguard Explorer (VEXPX),  Morgan Growth (VMRGX), and  Vanguard Growth & Income (VQNPX) are all estimating distributions of between 4% and 5% of their current NAVs.

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