Fund shareholders to face big tax bills

Mutual fund shareholders are looking at big tax bills for 2007. In an analysis, Morningstar's director of mutual fund research Russel Kinnel said capital gains payouts in 2007 rose for the fourth straight year. In 2007, the average U.S. equity fund paid out capital gains distributions equal to 6.89% of year-end net-asset value. That compares with 4.17% of assets in 2006, 3.32% in 2005, and 1.67% in 2004, Mr. Kinnel wrote. “In any area where you find, big three- to five-year return numbers, you're almost certain to get big distributions,” said Mr. Kinnel in an interview. Charge-offs from the last bear market are gone, he said in his article. Small-capitalization funds and foreign and emerging markets funds had particularly large capital gain distributions last year, according to Morningstar. Mr. Kinnel said that mutual funds with large accumulated gains, smaller asset bases, fewer shareholders and higher turnover are more likely to make large distributions.