Brace Yourself for Another Nasty Capital Gains Season

Editor's note: This article has been updated with the latest information, including data for Vanguard and T.Rowe Price.

What's not to love about a rising stock market? Big tax bills for some mutual fund shareholders, that's what.

Mutual fund firms have begun publishing their estimated capital gains distributions in recent weeks. While it's too early to conclude that 2017 will be a particularly bad year from the standpoint of outsize distributions, the same factors that led funds to make big distributions in 2016 are in place again this year.

For starters, the equity market been on an extended tear, with the S&P 500 gaining more than 15% for the year to date through late October. If investors were steadily shoveling money into funds even as their holdings appreciated, that might not be such a big deal. But many active funds have actually been contending with asset outflows over the past few years: For the trailing one-year period through September 2017, investors had pulled nearly $240 billion from active U.S. equity funds. That's on pace with their redemptions over the same time frame a year ago.

The net effect of the asset outflows in a rising market is that active fund managers have to sell appreciated positions to meet investor withdrawals, and that action triggers capital gains distributions. In fact, the very category that has seen the biggest redemptions over the past year--large growth--has posted the highest returns of any diversified domestic-equity category so far in 2017.

Mutual Fund Capital Gains, Unpacked If investors hold a fund that's making a big distribution in a taxable account, they'll owe taxes on the distributed gains unless they can sell losing positions to offset the gains. (Like mutual fund managers, however, most investors don't have a lot of losing holdings in their portfolios at this point.) And they'll owe taxes regardless of whether they spent the distribution or reinvested it.

On the plus side, investors in tax-sheltered accounts don't have to worry about their funds' capital gains distributions; they'll only owe taxes when they themselves begin selling their holdings. (Qualified withdrawals from Roth IRAs aren't taxed at all.) It's also worth noting that reinvested capital gains help increase the investor's cost basis; that has the potential to lessen the amount of capital gains taxes due when the position is eventually sold. Investors who hold a serial capital-gains distributing fund in their portfolios may find that, owing to the step-ups in cost basis they've received in years past, selling the tax-unfriendly fund may cost them less than they would expect. This article discusses the topic in greater detail.

Here's a review of where some of the larger shops stand with respect to capital gains estimates so far. (Clicking on the fund company names below will take you to each fund company's own estimates.) For shops where information wasn't yet available as of our publication date, we'll link to and provide information about their estimates as they become available.

American Funds

As in years past, American Funds deserves plaudits for publishing its capital gains estimates as a percentage of its net asset values; that makes it easy to discern whether a distribution is significant. As of mid-September, the firm's

As of Sept. 30, a handful of AMG funds were estimating total capital gains distributions in excess of 10% of NAV. AMG Frontier Small Cap Growth MSSCX, for example, was anticipating a total distribution of more than 20% of its net asset value.

Ariel Funds

Columbia Threadneedle

The Columbia Acorn funds have been serial distributors of large capital gains, and 2017 is shaping up as no exception. The funds have seen a series of manager changes in recent years, accompanied by declines in their asset bases.

Dodge & Cox As of Oct. 26, Dodge & Cox hadn't yet published capital gains distribution estimates for its mutual fund lineup. We'll link to the estimates when they become available.

Fidelity Funds

Across Fidelity's large lineup, several funds are anticipating meaningful capital gains distribution. That's probably not surprising when you consider that many of the firm's largest funds lean toward the growth side of the style box, and such stocks have performed best during the current rally. Moreover, Fidelity's active-fund lineup hasn't been immune to investors' ongoing preference for passive products. Indeed,

Among the growth-oriented funds expecting sizable distributions are

Not all of the big distributions are coming from the growth side of the house.

Franklin Templeton

Many of the very large funds under the Franklin Templeton umbrella are income-centric, so they pay out most of their distributions in the form of income, and capital gains aren't meaningful. Yet a few of the firm's large funds are anticipating sizable capital gains distributions in December.

Janus Henderson

As of early September,

Longleaf Partners

As of Sept. 30,

JP Morgan

Morgan Stanley As of Oct. 26, Morgan Stanley hadn't yet published capital gains distribution estimates for its mutual fund lineup. We'll link to the estimates when they become available.

Oakmark As of Oct. 26, Oakmark hadn't yet published capital gains distribution estimates for its mutual fund lineup. We'll link to the estimates when they become available.

Primecap Odyssey As of Sept. 30, none of the Primecap Odyssey funds was anticipating a sizable capital gains distribution for the year.

Several T. Rowe Price funds are making sizable distributions. Leading the way are three growth-oriented funds--

Vanguard

A handful of Vanguard funds will be making sizable capital gains distributions in mid-December.