(PUB) Investing 2015

April 2015 Vol. 23 No. 8

FundInvestor Research and recommendatio s for the s riou fund investo

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Tax Bills on the Rise for Fund Investors

Potential capital gains exposure tells you roughly how much a fund would pay out if it turned over its entire portfolio. It’s a useful measure in figuring out if a fund is likely to make a distribution. Funds report the figure once a year, and Morningstar then adjusts it monthly to reflect appreciation or depreciation in the fund. You can find a fund’s potential capital gains ex- posure in our one-page reports on mfi.morningstar.com . The figure is located in the middle of the page, on the left side just above the analyst’s byline. I should note that all of this applies to stock funds only, because bond funds’ returns come through chiefly as income, and there are no capital gains if they hold a bond to maturity. In addition, when funds replace maturing bonds with new bonds, that counts as turn- over, yet it wouldn’t spur capital gains distributions. see if a fund has sizable redemptions. Say a fund sees 20% of its assets go out the door, that means it probably has to sell about 20% of the portfolio, unless it is sitting on a huge pile of cash. What’s happening here is you have to go deeper into your pile of stocks held at a gain, and you are spreading those gains out over fewer and fewer shareholders. It’s a little unusual to have redemptions in a fund that has had sizable gains, yet that’s just what we are seeing in a lot of equity funds these days. I also want to know a fund’s turnover rate. Generally, a fund won’t have huge, built-up capital gains if it has a high turnover rate, but you will see some with high potential capital gains exposure and a turnover rate above 40% . In such cases, it’s a given that you will see some distributions. Let’s first There’s a little more information we need to see, though, before we issue a tax warning. First, I want to

RusselKinnel, Director of Fund Research and Editor

Fund Reports

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The downside to a seven-year bull market is taxes. Even if you don’t sell your funds, you will be getting more capital gains distributions, which require you to pay taxes (unless your funds are in a tax-sheltered account.) We’ve seen the amount of capital gains steadily creep up in recent years, and that figures to continue as long as the stock market rally does. Selected American Shares SLADX is a good example. In 2009 , the fund gained 32% but made no capital gains payout because it had loss write-offs from the bear market. It gained 12 . 9% in 2010 and lost 4% in 2011 , again with no capital gains payout in either year. But the stock market gained steam in 2012 , and the fund made its first payout in a decade at $2 . 25 per share—about 5% a share. Then in 2013 , it paid out $4 . 28 per share, or 10% , and in 2014 , it paid out a hefty $9 . 71 —about 20% per share. Not only did the fund burn through its charge-offs, but it also suffered redemptions that spurred selling. Also, comanager Ken Feinberg’s departure in early 2014 spurred management to clear out some of Feinberg’s favorite picks. The fund and its Davis New York Venture NYVTX sibling still have potential capital gains exposure of 50% of assets under manage- ment, so the payouts will probably keep coming.

Janus High-Yield Perkins Mid Cap Value Vanguard Health Care Vanguard Mid Cap Growth

Morningstar Research

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Expense Ratios Are Falling

The Contrarian

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Shelter From a Rising Dollar

Red Flags

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Big Biotech Bets

Market Overview

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Leaders & Laggards

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Manager Changes and News

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Portfolio Matters

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GMO’s Ben Inker Sees Dark Skies Ahead

Tracking Morningstar

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Analyst Ratings

Income Strategist

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Where Yield Is a Red Flag

FundInvestor 500

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FundInvestor 500 Spotlight

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Follow Russ on Twitter @RussKinnel

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