Get ready. Capital-gains distributions are coming.
Mutual funds distribute capital gains annually, and now is when investors get a sense of how big their tax bill will be. Fund companies try to estimate how much their funds will distribute in income and capital gains between now and the end of the year. Typically, distributions amount to 5% to 10% of a fund’s net asset value, according to Morningstar. Anything over 10% is a sizable distribution.
The gains are only an immediate concern for taxable accounts. Funds in a 401(k), individual retirement account, or other tax-deferred account aren’t taxed until you pull out the money.
Investors in some popular funds with distributions in excess of 10% and 20% are in for a big surprise. The final percentage will vary, based on the fund’s NAV at the time of distribution.
Funds with estimated distributions above 20% of NAV land in the annual “doghouse list” maintained by Mark Wilson, president of MILE Wealth Management. He tracks mutual funds’ estimated capital-gains payouts and posts them on his website, CapGainsValet.com.
| Fund / Ticker | AUM (mil) | Capital Gains Estimates |
|---|---|---|
| Delaware Ivy Value / IYVAX | 529.7 | 29.0% |
| Columbia Real Estate Equity / CREEX | 159.8 | 26.3 |
| Federated Hermes Kaufmann Large Cap / KLCKX | 1,700 | 26.3 |
| Federated Hermes Max Cap Index / FMXKX | 200.8 | 25.5 |
| Diamond Hill Small Cap / DHSCX | 243.8 | 23.1 |
| JPMorgan Tax Aware Equity / JPDEX | 827.4 | 21.4 |
| DWS Equity 500 Index Fund / BTIIX | 372.5 | 19.7 |
| Virtus NFJ Global Sustainabiltiy / ASTNX | 55.2 | 16.9 |
| MFS Technology / MTCAX | 1,600 | 14.0 |
| Virtus Ceredex Small-Cap Value Equity / SCETX | 117.8 | 13.7 |
| Delaware Value / DDVAX | 4,600 | 13.3 |
| Delaware Sustainable Equity Income / IDAAX | 53.1 | 13.1 |
| TIAA-CREF Growth & Income Fund / TIIRX | 5,600 | 12.4 |
| JPMorgan US Large Cap Core Plus / JLPSX | 1,500 | 12.2 |
| Invesco Oppenheimer Intlernational Growth / OIGAX | 7,200 | 12.1 |
| Alger Capital Appreciation Institutional / ACARX | 2,000 | 11.7 |
| Delaware Ivy Science and Technology / WSTAX | 5,100 | 11.7 |
| PGIM Quant Solutions Stock Index / PSIFX | 694.5 | 11.7 |
| First Eagle Rising Dividend / FEAMX | 376.5 | 11.7 |
| DWS Science and Technology / KTCAX | 1,300 | 11.6 |
Source: Morningstar
One fund that stands out this year is
JPMorgan Tax Aware Equity
(ticker: JPDEX), which will likely distribute at least 20%. Another is
DWS Equity 500 Index
(BTIIX), which will distribute roughly 20% after the fund saw an estimated 35% of assets head out the door.
“There are piles of S&P 500 index funds out there that aren’t distributing anywhere near to 20%,” Wilson says.
The good news for shareholders is that 2023 is “an abnormally small year for large capital-gains distributions,” according to Wilson. But it’s still important to pay attention in case there is a nasty surprise in the form of a big tax bill—or if you are thinking of buying one of the funds that has a high distribution. In that case, taxable investors should consider waiting until after the payout to avoid getting distributions without the benefit of any gains.
Last year the broad stock market plunged 18%, handing fund managers an opportunity to harvest some losses to offset potential gains. But some areas of the market—such as large-cap growth—have rebounded in 2023, and many funds still have long-term winners on the books thanks to the long bull market before 2020, says Stephen Welch, a senior manager research analyst at Morningstar Research Services and author of the firm’s 2023 capital-gains round-up.
“Since investors continued to pull money from traditional actively managed funds in the first nine months of 2023, many money managers had to realize gains to meet redemptions,” he says. “Funds must pass those long- and short-term proceeds to shareholders who, if they own their funds in taxable accounts, must pay taxes.”
Morningstar’s report focused on strategies with at least 4% in estimated distributions. The 20-percenters include funds from firms such as Columbia Threadneedle, Diamond Hill, Delaware Funds by Macquarie, and Federated Hermes.
Diamond Hill Small Cap
(DHSCX) estimates a “whopping” distribution of 23.1%, as the fund’s assets have shrunk by nearly 25% owing to outflows.
Several Delaware funds will make some of the largest distributions, including six that will likely pay distributions in excess of 10%, according to the Morningstar report.
Delaware Ivy Value
(IYVAX) estimates a distribution of 29% after suffering outflows of nearly 50% this year.
A handful of Vanguard funds will distribute more than 5% in gains in December. They include
Vanguard Growth & Income
(VQNPX), with an estimated distribution of 7.8%;
Vanguard Selected Value
(VASVX), with 7.6%; and
Vanguard Windsor
(VWNDX), at 7%.
Write to Lauren Foster at [email protected]
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