(PUB) Investing 2015

Tax Bills on the Rise for Fund Investors Continued From Cover

2

look at the funds with outflows and big potential capital gains exposures.

strategy. The fund distributed 15% of net asset value last year.

Fidelity Growth Company FDGRX is an unexpected name on this list. Performance has been great under Steve Wymer, so it’s no surprise that the fund has a big potential capital gains exposure of 52% . But it is surprising that the fund has seen redemptions of about 14% of AUM during the past 12 months. Fidelity has reported in the past that some of the money coming out of big funds like this is not redemptions but actually conversions to collective investment trusts. CIT s are lower-cost, less transparent versions of mutual funds that some 401 (k)s now prefer. We haven’t heard how much of those redemptions are actually conversions, so the true level of redemptions is a little unclear. Fidelity Low-Priced Stock FLPSX is in a similar situ- ation, though recent performance has been more middling than brilliant. The fund is seeing about 12% of AUM leave. The fact that the fund only paid out about 4% of AUM may mean that much of that money is CIT conversions and that they don’t require selling the way a normal redemption would. Dreyfus Appreciation DGAGX has single-digit turnover, so the end is not nigh. Yet it does have about 12% in redemptions during the past 12 months and a 52%

The Trouble With Outflows It isn’t pretty. A fund underperforms, leading investors to bail, and those who stick around see their tax bills rise even as they are disappointed by performance. The Selected American example is just such a case. In fact, it may have more distributions to make. Selected American and Davis New York Venture both saw about 20% of assets go out the past 12 months, and they have potential capital gains exposures of 52% and 48% , respectively. Both funds have Morningstar Analyst Ratings of Bronze, so obviously we expect them to rebound, but it’s worth knowing the price of that bet. The situation is worse for Columbia Acorn ACRNX , where 30% of assets have left in the past 12 months. The fund has about 54% potential capital gains exposure. What makes things worse, though, is that the fund invests in small- and mid-cap names, which may suffer from depressed share prices because the fund owns so many of them. Thus, you have the potential for a double hit to returns and taxes. This is part of the reason we lowered the fund’s Analyst Rating to Neutral from Bronze, although Columbia Acorn does have some good analysts and a sound

Funds With the Highest Potential Capital Gains Exposure

Potential Capital Gains Exposure %

Annual Capital Gain 2011

Annual Capital Gain 2012

Annual Capital Gain 2013

Annual Capital Gain 2014

Net Flow 1 Yr ($ Mil)

Fund Size ($ Mil)

Turnover Ratio %

Name

Ticker

NAV

Vanguard PRIMECAP

VPMCX

78.33

-331

48,031

11

2.10

0.72

3.77

5.71 108.31

Gabelli Asset

GABAX

63.54

-319

3,571

5

0.93

2.81

2.99

2.98 66.81

Columbia Acorn

ACRNX

53.47

-6,016

14,659

17

1.19

1.82

2.32

5.61 33.55

Dreyfus Appreciation Investor

DGAGX

52.37

-898

5,056

7

— — — 1.95 54.80

Fidelity Growth Company

FDGRX

51.93

-7,474

44,743

12

2.71

2.28

8.12

5.06 141.22

Selected American Shares

SLADX

50.44

-1,181

4,959

26

— 2.19

4.28

9.68 44.75

Touchstone Sands Cap Sel Growth

PTSGX

49.76

-351

6,323

30

— — 0.13

0.88 18.57

T. Rowe Price Growth & Income

PRGIX

48.68

-50

1,619

15

— — — 0.89 33.11

Davis NY Venture

NYVTX

48.41

-3,900

17,80

20

— 1.40

4.45

7.04 38.10

T. Rowe Price Health Sciences

PRHSX

47.62

833

13,647

42

0.96

1.67

4.43

8.10 79.28

Morgan Stanley Inst Growth

MSEGX

45.40

-101

3,663

44

— 0.04

1.58

1.92 41.10

Fidelity Contrafund

FCNTX

45.23

-12,741

112,847

45

0.15

0.65

7.33

6.89 103.10

Fidelity Low-Priced Stock

FLPSX

44.24

-5,867

46,553

12

2.21

2.28

2.91

2.44 51.97

Data through March 16, 2015.