More Tax Pain for Some Mutual Fund Shareholders in 2018
Ongoing redemptions from active funds and a long-running bull market mean tax pain for many fund investors in taxable accounts.
Mutual fund capital gains distributions were easy enough to shrug off in 2016 and 2017, as stocks posted double-digit gains in both years. Yet as capital gains distribution season dawns in 2018, investors in many equity mutual funds are barely clinging to gains for the year, and some may have even experienced losses in their holdings. The fact that many mutual funds are likely to dish out capital gains distributions that are on par with--or even higher than--years past adds insult to injury.
After all, the same factors that led funds to make big distributions in 2017 are in place again this year. Because stocks have been running up for the better part of a decade, most U.S. equity funds hold appreciated holdings in their portfolios. At the same time, investors continue to yank their dollars from many actively managed funds, and that forced selling can force management to sell appreciated positions. Those distributions, in turn, are made to a reduced group of shareholders. That's where big capital gains distributions come in.
Implications for Fundholders
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. (In contrast with 2016 and 2017, some investors may actually be able to take advantage of tax-loss selling in 2018.) 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.
Among the funds in the AB stable making the largest distributions are AB Discovery Growth (CHCLX) (15% of NAV), AB Growth (AGRFX) (14% of NAV), and Small Cap Growth (QUASX) (14% of NAV).
Bronze-rated Growth Fund of America (AGTHX), the firm's largest fund, plans to make a late-December long-term capital gains distribution amounting to 9%-11% of its mid-September NAV. The fund's performance has been competitive, notes senior analyst Alec Lucas, but like many actively managed large-growth funds, it has been contending with steady outflows for the better part of five years. Sibling New Economy (ANEFX), also a large-growth fund, is planning a distribution in that same ballpark. While its very long-term results remain excellent, its heavy complement of foreign stocks has dragged it into the large-growth category's cellar for the year to date. AMCAP Fund (AMCPX) (estimated distribution: 5%-8% of mid-September NAV), Fundamental Investors (ANCFX) (7%-9% of NAV), Investment Company of America (AIVSX) (6%-8% of NAV), SMALLCAP World (SMCWX) (5%-7% of NAV), and Growth Portfolio (GWPAX) (5%-6% of NAV) were all estimating distributions in excess of 5% of their mid-September NAVs. (Of course, the market declined in October, so it's possible that the distributions will be below those estimates.)
The Gold-rated AMG Yacktman (YACKX) and Silver-rated AMG Yacktman Focused (YAFFX), among the largest and best-known funds in the AMG stable, are both planning sizable distributions in late December 2018, amounting to 17% and 16%, respectively, of their NAVs. Performance has been superb at both offerings, but they've still seen redemptions in recent years. Moreover, senior analyst Kevin McDevitt reports that both funds have been taking some profits in their large Twenty-First Century Fox (FOX) holdings following its acquisition by Walt Disney Co (DIS), which in turn has boosted the capital gains distribution. AMG Managers Montag & Caldwell Growth (MCGFX), which currently receives a Neutral rating, is also anticipating a sizable distribution of about 20% of its NAV. AMG GW&K Small Cap Core (GWETX) (9% of NAV), AMG TimesSquare Mid Cap Growth (TMDIX) (9% of NAV), and AMG TimesSquare Small Cap Growth (TSCIX) (16% of NAV) are all expecting to pay out capital gains later this year, too.
Within Ariel's lineup, only the flagship Ariel Fund (ARGFX), Bronze-rated, expects to make a meaningful long-term capital gains distribution. The firm is anticipating a payout of roughly 7% of NAV in mid-November.
Some funds under the Artisan umbrella are making very large payouts on Nov. 19. Bronze-rated Artisan International Small Cap (ARTJX) tops the list, with an estimated distribution that amounts to 38% of its current NAV. The fund underwent a management change and portfolio overhaul in October, and many of its holdings had large embedded gains, which triggered the distribution. Artisan Mid Cap (ARTMX) is making the next-largest distribution in the shop, amounting to 20% of its current NAV. The fund retains its Silver rating, but its performance has been streaky and its asset base has slumped. Silver-rated Artisan Small Cap (ARTSX), run by the same team that manages Mid Cap, expects to distribute capital gains equal to 16% of its NAV. Both funds are closed to new investors, and it's typical of closed funds to have more redemptions than they do inflows. Global Equity (ARTHX) (14% of NAV), Mid Cap Value (ARTQX) (13% of NAV), and Value (ARTLX) (11% of NAV) are all making meaningful distributions as well. Finally, Artisan International (ARTIX), the firm's second-largest fund, is making a distribution of approximately 8% of its NAV.
While capital gains distributions aren't as large or as widespread among Columbia Acorn funds in 2018 as they have been in the past, they're nonetheless significant in some cases. Columbia Acorn International (ACINX) leads the way with an anticipated payout that amounts to 18%-19% of its September-end NAV. Columbia Acorn (LACAX) (7%-8% of NAV), Acorn Select (LTFAX) (8%-9% of NAV), and Acorn USA(LAUAX) (9%-10% of NAV) all expect to make smaller payouts. Elsewhere in the family, Columbia Mid Cap Growth (CLSPX) expects to make one of the largest payouts, amounting to about 18% of its NAV; Columbia Small Cap Growth (CMSCX) is also targeting a large payout of 14%-15% of NAV. Columbia Select Large Cap Growth (UMLGX) is anticipating an 11%-12% distribution, while Columbia Select Mid Cap Value (NAMAX) is making a payout of 16%-18% of its NAV. In addition, the $11 billion, Bronze-rated Columbia Contrarian Core (LCCAX) anticipates a payout that amounts to 6%-7% of its NAV, Columbia Disciplined Value (RLCAX) is targeting a distribution of 7%-8% of NAV, Columbia Disciplined Growth (RDLAX) is paying out 9%-11% of NAV, and Columbia Dividend Opportunity (CDOZX) expects to pay out 8%-9% of NAV. Columbia Large Cap Growth (GEGTX) and Columbia Large Cap Value (CDVZX) anticipate payouts in the 7%-8% range. Bronze-rated Columbia Seligman Communications and Information (CCIZX) and Columbia Seligman Global Technology (CSGZX) (unrated) both anticipate distributions in the 8%-9% range.
Dodge & Cox
Dodge & Cox will make its capital gains distributions on Dec. 20. Dodge & Cox Stock (DODGX) and Global Stock (DODWX) will be distributing roughly 6% of their NAVs, while Balanced (DODBX) will distribute approximately 5% of its NAV. International Stock (DODFX) will not be making a distribution.
Fidelity Stock Selector Mid Cap (FSSMX) and Fidelity Stock Selector Small Cap (FDSCX) are targeting some of the largest distributions in the shop, amounting to 11% and 16%, respectively, of their September-end NAVs. Fidelity Capital Appreciation (FDCAX), rated Neutral, is expecting to make a capital gains distribution that amounts to 9% of its September-end NAV, while Fidelity Disciplined Equity (FDEQX) and the Silver-rated Fidelity Small Cap Discovery (FSCRX) are expecting to distribute 10% of their NAVs. Fidelity Equity Dividend Income (FEQTX) (Neutral rating) is anticipating a distribution equal to 8% of its NAV, while Focused Stock (FTQGX) is targeting a 9% payout. Fidelity Independence (FDFFX) is anticipating an 8% payout, while the Bronze-rated Fidelity New Millennium (FMILX) expects to pay out 7% of its NAV in the form of capital gains distributions. Fidelity Value (FDVLX) expects to pay out 10% of its September-end NAV, while Fidelity Value Strategies (FSLSX) is making a 9% payout. Both funds receive Neutral ratings currently. Silver-rated Fidelity Contrafund (FCNTX) is targeting a modest distribution amounting to 5% of its September-end NAV.
Among sizable funds under the Franklin Templeton umbrella, some of the biggest distributions are coming from Franklin Growth Opportunities (FGRAX), which anticipates a distribution of 9%-12% of NAV, Franklin Small Cap Growth (FSGRX) (12%-16% of NAV), Franklin Small Cap Value (FRVLX) (11%-15% of NAV), and Franklin Small-Mid Cap Growth (FRSGX) (9%-13% of NAV). Templeton Growth (TEPLX) TEMWX is planning a distribution that amounts to 6%-9% of NAV, whereas Templeton World (TEMWX) was planning an 8%-12% distribution. Franklin Mutual Beacon (BEGRX) and Franklin Mutual Global Discovery (MDISX), both Bronze-rated, are planning distributions of 5%-7% of NAV.
Harbor International (HIINX) announced that it was expecting a sizable capital gains distribution, which it estimated would be roughly a third of its NAV, following the replacement of subadvisor Northern Cross with Marathon Asset Management in August. However, the distribution is actually expected to be a bit larger than originally expected, amounting to 40% of its late-October NAV. Silver-rated Harbor Capital Appreciation (HACAX), the firm's largest fund, is planning a capital gains distribution that amounts to 9% of its NAV. The Bronze-rated Harbor Small Cap Growth (HASGX) is also planning a big payout of 20%-23% of its NAV (the percentages vary by share class), while Harbor Small Cap Growth Opportunities (HASOX) is planning to make a capital gains payout of 18% of NAV. Harbor Mid Cap Growth (HAMGX) is expecting to pay out 17%-18% of its NAV. Silver-rated Small Cap Value (HASCX) is expecting to make a distribution that amounts to 9% of its NAV.
Among sizable Janus Henderson funds planning notable capital gains distributions in 2018, Janus Henderson Global Select (JORAX) and International Opportunities (HFOAX) lead the way, with estimated distributions of 12% and 11% of their early September NAVs, respectively. Bronze-rated Mid Cap Value (JDPAX), Contrarian (JCNAX) (Neutral rating), Research (JRAAX) (Neutral), and Venture (JVTAX) (Bronze) are all anticipating distributions of between 6% and 8% of their September NAVs.
Among J.P. Morgan's larger funds, the Neutral-rated Intrepid Mid Cap (PECAX) is planning one of the larger distributions, amounting to 14% of its NAV. Small Cap Growth (PGSGX) (12% of NAV), Large Cap Core Plus (JLCAX) (11% of NAV), Large Cap Growth (OLGAX) (10% of NAV), Market Expansion Enhanced Index (OMEAX) (10% of NAV), and US Equity (JUEAX) (10% of NAV) are all anticipating distributions as well. Global Research Enhanced Index (JEITX), Intrepid America (JIAAX), Intrepid Growth ((JIGAX)), Intrepid Value (JIVAX), Mid Cap Equity (JCMAX), Small Cap Value (PSOAX), U.S. Research Enhanced Equity (JDEAX), and U.S. Small Company (JTUAX) are all anticipating distributions in the 8%-9% of NAV range.
Serial capital gains distributor Longleaf Partners (LLPFX) will pay out 13% of its NAV in late November. Amid volatile performance and another year of weak returns in 2018, the Neutral-rated fund’s asset base has shrunk significantly. Bronze-rated Longleaf Partners Small-Cap (LLSCX) expects to pay out 11% of its NAV, while Longleaf Partners Global (LLGLX) is making an 8% distribution.
MFS New Discovery (MNDAX), rated Neutral, is planning one of the largest distributions at the firm, amounting to 12%-17% of its NAV. MFS Research (MFRFX), rated Bronze, anticipates a distribution of 8%-11% of NAV. MFS Massachusetts Growth Stock (MIGFX), Bronze-rated, is planning a distribution of 6%-8% of its NAV; MFS Massachusetts Investors Trust (MITTX), rated Silver, expects to pay out 7%-9% of NAV. MFS Core Equity (MRGAX), which receives a Neutral rating currently, is anticipating a distribution that’s 7%-9% of NAV.
A handful of Morgan Stanley funds are making whopping capital gains distributions. Institutional Mid Cap Growth (MPEGX) and Institutional Small Company Growth (MSSMX) expect to pay out distributions amounting to 25% and 17%, respectively, of their NAVs. Bronze-rated Institutional International Equity (MIQBX) is anticipating a payout of 12% of NAV.
By far the largest distribution in the firm is coming from Gold-rated Oakmark Global (OAKGX), which is expected to make a distribution of 11% of its NAV. That payout adds insult to injury amid a weak performance streak; the fund has lost 11% for the year to date through mid-November, owing to its value bias and emphasis on foreign stocks versus U.S. Oakmark Equity and Income (OAKBX), rated Silver, expects to pay out roughly 8% of NAV. Although its long-term record is solid, short-term results have been lackluster; the fund has lost 3.4% for the year to date and assets have been shrinking. Smaller distributions are expected from Oakmark Fund (OAKMX) (7% of NAV), International (OAKIX), and International Small-Cap (OAKEX) (6% of NAV apiece).
Within the Oppenheimer lineup, the fund with the largest capital gains distribution as a percentage of NAV is Silver-rated Oppenheimer Discovery (OPOCX), which anticipates a 13% payout. Oppenheimer Main Street (MSIGX), Bronze-rated, is expecting to payout 11% of its NAV, while Oppenheimer Value (CGRWX) estimates a 10% payout. Oppenheimer Equity Income (OAEIX) and Global (OPPAX) both anticipate payouts in the 9% range, while Main Street Mid Cap (OPMSX) expects to make a distribution of 8% of its NAV.
Of the Primecap Odyssey funds, only the Gold-rated Aggressive Growth (POAGX) anticipates a meaningful capital gains distribution, amounting to just over 6% of its NAV through the end of October.
T. Rowe Price
The biggest payouts, as a percentage of NAV, in T. Rowe Price's lineup will come from two technology sector funds. T. Rowe Price Science and Technology (PRSCX) will distribute roughly a fourth of its current NAV, whereas T. Rowe Price Global Technology (PRGTX) (Silver rated) will distribute 21% of its NAV. In both cases, a fairly high percentage of the gains will be classified as short-term gains and therefore subject to ordinary income tax. Among the firm's diversified funds, New Horizons (PRNHX) and New America Growth (PRWAX) are making some of the largest distributions, amounting to 11% and 10% of their NAVs, respectively. Mid-Cap Growth (RPMGX), Growth & Income (PRGIX), and Small-Cap Stock (OTCFX) are all estimating payouts to be roughly 9% of NAV, while Mid-Cap Value (TRMCX) and Value (TRVLX) are estimating payouts in the 8% of NAV range.
Vanguard released its capital gains distribution estimates on Nov. 12, a bit later than some of its peers. In keeping with distributions at some other firms, many of the biggest payouts are coming from actively managed growth-oriented funds. Vanguard Mid Cap Growth (VMGRX), a relative small fry in the Vanguard lineup, with just $4.2 billion in assets, is making the largest distribution in the firm, amounting to 12.7% of its NAV. Capital Opportunity (VHCOX), closed to new investors, is expecting to make a payout amounting to 9% of its NAV. Sibling Primecap (VPMCX), which is also closed and managed by the same team, anticipates a smaller payout of 6% of NAV. Explorer (VEXPX), a mid-cap growth fund, is anticipating a payout of 8.8% of NAV, while Morgan Growth (VMRAX) is expecting to pay out 8.1% of NAV. Not all of the capital gains payouts are coming from the growth side of the shop, however. The value-leaning Windsor II (VWNFX) is anticipating a 9%-of-NAV distribution, while Vanguard Selected Value (VASVX) is expecting to pay out 7% of its NAV. The firm's quantitatively managed offerings, Strategic Equity (VSEQX) and Strategic Small-Cap Equity (VSTCX), are paying out 7% and 8% of their NAVs, respectively.
Christine Benz has a position in the following securities mentioned above: OTCFX, HACAX. Find out about Morningstar’s editorial policies.