3 Funds Whose Tax Bills Might Tick Up

Russel Kinnel: Mutual fund tax season comes before individual investor tax season. Fund fiscal years end in October, then they tally up their net capital gains and distribute them to fundholders in December, who then turn around and pay the taxes on them the following April. Generally, it’s only a small portion of the fund’s returns, but occasionally the payouts can be sizable.

I looked for funds that are more likely to make big payouts this year. I would emphasize I’m only saying more likely—not at all a certainty. For these funds, you might want to be careful about buying them in a taxable account until they’ve made the payouts. Capital gains aren’t an issue for tax-sheltered accounts like IRAs and 401(k)s. In each case, I looked for funds with large built-up gains and a possible catalyst for more selling than usual.

3 Funds Whose Tax Bills Might Tick Up

1. Akre Focus AKREX

2. Vanguard Primecap VPMAX

3. Diamond Hill Small Cap DHSCX

Akre Focus is a $12 billion fund that has seen $1.1 billion in redemptions year to date. It also had a comanager leave the fund. So, there are a couple of reasons why sales might accelerate at a fund that normally has very low turnover.

Vanguard Primecap is a $62 billion fund that has had $4.2 billion go out the door in 2023. The Primecap funds tend to overweight healthcare, and that’s led to poor to middling returns recently. Hence the outflows. Also, the fund is closed to new investors, which limits the amount of inflows that could come in and reduce the need to sell to meet outflows.

Diamond Hill Small Cap manager Aaron Monroe took over in March 2023. He’s been with the team for a while, so I certainly don’t expect a big overhaul of the portfolio. But he might have made some changes. In addition, the fund is in redemptions, which net might lead to a bigger-than-average payout.

Watch “3 Funds Betting Big on IPOs” for more from Russ Kinnel.