Ready for a Big Capital Gains Tax Bill?

It’s that time of the year again: capital gains distribution season. Fund companies are required to give investors an idea of what their 2024 tax bills might look like by estimating how much their funds will distribute in income and capital gains later this year.

Calendar-year 2024 was another strong year for many asset classes. In equities, large-cap growth funds did well as companies like Nvidia NVDA benefited from the artificial intelligence boom. While large-cap value has trailed growth, it has still returned more than 15% cumulatively on the year, so its results aren’t shabby, either.

With the ongoing trend of investors swapping actively managed stock funds for passive exchange-traded offerings, many managers have had to realize gains to meet redemptions. Funds must pass those long- and short-term proceeds to shareholders who, if they own their funds in taxable accounts, must pay taxes.

Fund families are still releasing their estimates, which they can still revise, but a preliminary look shows many strategies across the value-growth spectrum will make sizable distributions. Most will pay out their realized gains between late November and the end of the year.

This year, we highlight the 50 highest capital gains distribution estimates (as a percentage of each fund’s net asset value, or NAV) followed by a sampling of many larger fund families’ distribution estimates (with links to entire fund family lists if searching for a particular fund).

The common theme among most of these top 50 funds is outflows. Almost all the funds in the top 10 have had substantial outflows so far in 2024, typically above 30% of assets (based on total assets under management at the start of the year). Five of the top 10 had outflows of more than 50%. We typically used the oldest share class, but it is important to pay attention to which share class you own. For example, Columbia Seligman Technology and Information’s SLMCX A share class is estimated to distribute roughly 14% of NAV in capital gains; however, its C share class (SCICX) is estimated to distribute roughly 31% of its NAV. While both share classes are getting the same payout in dollar amount per share, those share classes have different NAVs and different initiation dates, leading to apparently large discrepancies.

Topping the list is Morgan Stanley Institutional Dynamic Value MAAQX, which is slated to distribute more than 50% in capital gains. Five other strategies are distributing more than 40%. All have lost roughly 50% of assets in the year or more. Only one strategy in the top 10, American Century Disciplined Growth ADSIX, has not had sizable outflows. It only had about 10% of its starting net assets withdrawn, but its high annual portfolio turnover (often more than 100%) likely forced the realization of some capital gains. This year, the strategy is distributing roughly 34% of NAV.

Funds tracking indexes aren’t immune to capital gains, either. For example, Nationwide NYSE Arca Technology 100 Index NWJCX tracks the NYSE Arca Technology 100 Index, which is a price-weighted index, and lands on this list. With stock splits of generative AI winners such as Nvidia and Broadcom AVGO, their weightings in the fund dropped significantly during the year. This forced the strategy to realize large capital gains in those holdings, and the fund will distribute roughly 20% this year.

Other funds have gone through personnel or process changes, which might have triggered capital gains. For example, Ariel Global AGLOX will distribute roughly 20% this year. The fund lost its star manager Rupal Bhansali late last year and had roughly 30% in outflows this year in the wake of her departure.

Why You Should Pay Attention to Capital Gains Distribution Estimates

If you invest in a tax-sheltered account, such as a 401(k) or an IRA, and you’re reinvesting your distributions, distribution previews seem like a nonevent because you won’t owe taxes until you sell your holdings in retirement and maybe not at all if you invest in a Roth IRA.

There are good reasons for others to pay attention to them, though. Investors with taxable accounts owe taxes on distributed gains, even if they reinvested them, unless they’ve sold losing positions to offset the gains.

Reinvested capital gains help increase your cost basis, which could reduce the capital gains taxes you owe when you eventually sell the fund. So, if you hold a serial capital gains-distributing fund, selling it in the future might cost less than you anticipated, owing to all the cost-basis step-ups that the regular distributions triggered.

Taxable investors considering buying a fund that has predicted it will make a distribution should consider delaying the purchase until after the payout to avoid getting distributions without the benefit of any of the gains.

Tax considerations, of course, are just one of the many factors in an investment decision. Check with a tax advisor before trading to avoid or capture a distribution.

Select Fund Company Distribution Projections

Abrdn

Alger

Alliance Bernstein

American Century

American Funds

AMG Funds

Ariel

Aristotle

Ave Maria

Baron

BlackRock

Brown Advisory

Calvert

Champlain

Clipper

Columbia Threadneedle

Davis

Delaware Funds

Diamond Hill

DWS

Eaton Vance

Federated Hermes

Fidelity

Franklin Templeton

Gabelli

Glenmede

Harbor

Harding Loevner

Hartford

Invesco

Janus Henderson

Jensen

John Hancock

J.P. Morgan

Lazard

MFS

Morgan Stanley

Nationwide

Northern Trust

Nuveen

Parnassus

PGIM

Pimco

Primecap

Principal

Royce

T. Rowe Price

Thrivent

Tweedy, Browne

Vanguard

Victory

Virtus

Voya