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.
AB (AllianceBernstein) 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).
Within Ariel's lineup, only the flagship
Some funds under the Artisan umbrella are making very large payouts on Nov. 19. Bronze-rated
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.
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.
Dodge & Cox will make its capital gains distributions on Dec. 20.
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.
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,
, 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
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
Among J.P. Morgan's larger funds, the Neutral-rated
Serial capital gains distributor
A handful of Morgan Stanley funds are making whopping capital gains distributions. Institutional
By far the largest distribution in the firm is coming from Gold-rated
Within the Oppenheimer lineup, the fund with the largest capital gains distribution as a percentage of NAV is Silver-rated
Of the Primecap Odyssey funds, only the Gold-rated
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
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.