Brace clients for a big capital gains season

Market-driven gains and active-fund outflows mean high distributions

Nov 2, 2017 @ 1:56 pm

By John Waggoner

Brace yourself – and your clients – for big capital gains distributions this year.

The number of funds with estimated distributions of 10% or more of their share price have already passed the 2016 mark, says Mark Wilson, CEO of Mile Wealth and creator of CapGainsValet, an internet site that tracks the number of funds with large capital gains distributions.

While only 37% of the fund companies he tracks have reported, more than 200 funds have distributions of 10% or more. In 2016, the total was 116. The year with the largest number was 517 in 2014, the year he began the site.


Why the rise in capital gains distributions? One big reason is the big gains in the stock market this year. The S&P 500 stock index has gained 17.09% this year, including reinvested dividends, according to Morningstar. Managers will often trim big positions to keep the fund well diversified, and that can mean generating capital gains. And as the 2007-09 bear market fades into the history books, big losses that can be used to offset gains are harder to find.

The other problem: Investors fleeing actively managed stock funds. Morningstar estimates that a net $112 billion has left stock funds this year. "There are some popular funds that have had a great year, and as people leave, managers have to sell. A lot of it is out of their control," Mr. Wilson said.

Even index funds can have large capital gains distributions if enough investors leave. PNC S&P 500 Index fund, (PIIAX) for example, is a $125 million fund with an estimated capital gains distribution of more than 20% this year. The fund has had an estimated net outflow of $55 million, according to Morningstar.


While the tally is still far from complete, Mr. Wilson counts six funds with estimated distributions of more than 30% of their net asset value. Among those in the capital gains doghouse is Morgan Stanley Institutional Mid Cap Growth Portfolio (MPEGX), with an estimated distribution of more than 40%. The $608 million fund has had net estimated outflows of $353.9 million this year, according to Morningstar.

Not all funds are registering gains this year. Energy funds, for example, are down an average 10.24%, in case clients are searching for losses to offset distributions.

Earlier in his career – and at another firm – Mr. Wilson said he had collected capital gains estimates from funds because many of his clients used active funds. He runs his own RIA business now, and still collects data – although he only uses passive funds in his practice.


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