Even if mutual fund investors have grown accustomed to the pain of the capital gains distributions that can hit whether a fund is sold or not, nobody wants to be blind-sided by a big distribution that doesn't seem to fit the strategy.
Two such examples this year are the Eaton Vance Tax-Managed Global Small Cap Fund (ESVAX) and the Pimco Long-Term U.S. Government Fund (PFGAX), both of which will be distributing capital gains in excess of 30%.
For mutual fund investors, capital gains are simply a fact of life that can only be avoided by selling the fund ahead of an annual distribution, which unfortunately can inflict additional pain on a smaller number of investors still holding the fund.
But investors should be able to feel somewhat protected in a fund that has “tax-managed” in its name.
The Pimco fund is an outlier for the simple fact that it stands out as the only bond fund with distributions beyond 20%, according to CapitalGainsValet.com.
In the case of the Eaton Vance fund, as is often the case, it boiled down to a manager change and mandate adjustment.
NEW PORTFOLIO MANAGER
The $31.6 million fund brought in a new portfolio manager, Aidan Farrell, in July and expanded the mandate from U.S.-focused to global small-cap equity.
“It's essentially a function of the substantial restructuring that took place in the fund,” said Eaton Vance spokeswoman Robyn Tice.
“As a firm, we made the decision that the best long-term strategy to take with this fund was to recast it as a global small-cap offering,” she added. “As part of this process, we had to transition a very large portion of the portfolio given the lack of non-U.S exposure in the prior strategy. This resulted in a good deal of turnover and some tax ramifications.”
The recent portfolio turnover activity, which will be reported in the fund's next prospectus, will likely be considerable higher than level currently posted as 48%.
The Eaton Vance fund is down 4% from the start of the year through Wednesday, which compares to a 0.26% gain for the world stock fund category, according to Morningstar Inc.
While turnover resulting from an expanded mandate might have been the culprit at Eaton Vance, the hefty capital gains distributions from the Pimco bond fund appears to rest squarely on the shoulders of net outflows.
THE BITE OF REDEMPTIONS
After starting the year as a $2.34 billion fund, the steady flow of redemptions has pushed the asset base down 71% to $670 million. The bulk of the outflows took place during February and March, when the asset fell to $706 million, from $2.3 billion.
Those net outflows have inevitably led to higher portfolio turnover, but turnover appears to be the modus operandi of this fund.
The current prospectus lists the annual turnover rate at 244%, which is up from 100% last year. The fiscal 2013 turnover rate was 143%, and it was 426% in fiscal year 2012.
Pimco representatives did not respond to a request for comment, but some analysts said the outflows could be linked to the sudden departure of founder Bill Gross in September 2014.
“I expected to see some outflows for this fund,” said Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.
“The fund did very well in 2014 as we saw pressure on interest rates make long-term bond products like this do very well,” he added. “It's very interest-rate sensitive, so it benefits as rates decline, but I don't know why investors would have sold it like that unless it had something to do with all the changes at Pimco.”
To be sure, Mr. Gross, who now manages bond portfolios at Janus Capital Group, was not running the Pimco Long-Term U.S. Government Fund, and the current manager, Stephen Rodosky, has been in place since July 2007.
The fund is down 0.75% so far this year, compared with a 0.25% gain for the long-term government bond fund category. Last year the fund gained 24.15%, which beat the category average gain of 21.7%.