These Funds Are About to Make Big Capital Gains Distributions (AGTHX, ACRNX)
Actively-managed mutual funds typically distribute their accumulated capital gains in November of each year, and investors who hold their funds in taxable retail accounts are required to pay tax on their proportionate share of the fund’s realized gains for the year. Investors who wish to purchase shares of these funds at this time of year therefore need to wait until after the gains have been distributed, because all shareholders of record on the date that the gains are distributed will owe tax on the gain. This means that investors who purchase shares of a fund right before it distributes it capital gains will owe tax on the previous year’s gains, even though they did not receive them.
Capital gains distributions are not expected to be high for most mutual funds this year, despite the gains that have been posted in the markets. However, there are a few funds that will be distributing substantial gains this year, and investors who own shares in these funds outside of an IRA or tax-deferred retirement plan need to be prepared to see some big numbers on their form 1099-Bs.
The steady rise in the markets since 2009 has led to some outsized gains in a few funds that are finally being realized as long-term winning holdings have been sold off. The following fund companies have released their estimated gains that they will be distributing to shareholders for 2016. (For related reading, see: Trump Advisor Promises Repeal of Fiduciary Rule.)
- The Growth Fund of America (AGTHX). The flow of capital out of this company’s family of funds has tapered off of late, and this has reduced the need to liquidate fund holdings to meet the demand for liquidity. While most of its equity funds are estimating capital gains that are approximately equal to 3% of their share price, this fund in particular has estimated that its long-term capital gains distributions this year will come in at around 5% to 7% of the share price.
- Columbia Acorn (ACRNX). This fund had enormous capital gains distributions in 2015, and this year will bring more of the same for its shareholders. The fund is estimating that its capital gain distributions will come in at around 15% to 20% of the fund’s share price. Its sister fund, Columbia Acorn USA (AUSAX), estimated that its gains will equal approximately 23% to 25% of the fund’s share price. Columbia Acorn Select (ACTWX) is also estimating capital gains of around 10% or 11% for the year.
- Fidelity Leveraged Company Stock (FLVCX). This fund is estimating that its capital gains distributions will come in at around 13% of the fund’s share price. Fidelity Value Strategies Fund (FSLSX) is also estimating that it will be distributing gains equal to about 11% of its share price due to subpar returns and a change in managers.
- Franklin Microcap Value Fund (FRMCX). This fund has projected its taxable gains to be equal to anywhere from 7% to 11% for the year. Franklin Small Cap Growth (FSGRX) has also forecasted a distribution of 3% to 8% of NAV.
- T. Rowe Price Growth and Income (PRGIX). This fund is estimating capital gains distributions equal to 17% of its share price. This is the largest gain posted by the fund family for the year.
The Bottom Line
Mutual fund shareholders who own these funds in a taxable retail account may want to pursue a tax-loss harvesting strategy in order to offset some of their taxable gains. They can sell shares of losing holdings and then buy them back after 31 days in accordance with the IRS wash sale rules. They can then net their realized losses against their gains in order to minimize their tax bill. (For related reading, see: 4 Mistakes Clients Make With Roth IRAs and Their Estate.)