(PUB) Investing 2016

2

Funds Facing a Tax Challenge Continued From Cover

past few years, so check with your brokerage to see what your cost basis is.)

Columbia Acorn USA AUSAX This fund has seen 40% of AUM go out the door, and it has PCGE of 49% . The fund is currently on a twice- a-year payout schedule with distributions in June and December. The June distributions have been much smaller than the ones in December. This June, the fund made a 13% payout, but in December, it made a huge 34% payout. That’s awfully hard on a taxable account. Royce Premier RYPRX After a long cold spell, this fund has rebounded to post strong 12 -month returns. Yet the three- and five-year returns are weak, and that explains why $1 . 7 billion has gone out the door, leaving the fund with $2 . 3 billion total.With a hefty 56% of capital gains exposure, it seems likely the fund will make a big distribution. A huge 38% weighting in industrials makes the fund pretty cyclical, but it still has a solid track record. Touchstone Sands Capital Select Growth PTSGX This fund’s 4 . 5% year-to-date loss makes it one of the worst-performing large-growth funds. Its big 42% tech weighting is the culprit, and a number of biotech stocks are hurting, too. That would make three straight years of underperformance. This leads me to believe that outflows will continue to be strong throughout the second half of 2016 . The fund has seen about 38% of AUM go out the door, and its 46% PCGE makes capital gains all but inevitable. In 2015 , the capital gains payout was a fairly modest 10% , but I doubt it will be that low this year. Baron Small Cap BSCFX This fund’s 31% outflow is a notch below that suffered by the Touchstone fund, but its PCGE is a very large 63% . With a low turnover last measured at 15% , the fund is certain to have some long-held names with large embedded gains. Manager Cliff Greenberg made an ill-timed bet on master limited partnerships that got hammered when oil prices dropped in 2015 . Dreyfus Appreciation DGAGX This is another very low turnover fund that doesn’t often make big capital gains distributions. But with a 62% PCGE and 30% outflows, it won’t likely have much choice. The fund’s high-quality bent gives it good defensive qualities, but it owns more energy

12 Funds Cruising for a Tax-Related Bruising Let’s take these 12 funds in order of outflows. I used their 12 -month organic growth rate, which essentially tells you by what percentage the funds have shrunk from their original asset base a year ago. Selected American SLADX This fund saw nearly half its assets ( 48% ) go out the door, and it has a PCGE of 50% . In fact, it just made a 10% distribution on July 1 . In each of the past two years, it made distributions in July and December. Last year, the December payout was a little smaller than the July payout, but it still seems likely that payouts will continue as long as outflows do. Kalmar Growth-with-Value Small Cap KGSCX Things are looking tough for Kalmar Investments. This fund had $436 million in outflows the past 12 months, leaving it down to just $180 million. In addition, Vanguard fired it from running a sleeve of Vanguard Morgan Growth VMRGX , though it still runs a piece of Vanguard Explorer VEXPX . The fund has a 66% PCGE . So, for the short term I’m worried about capital gains payouts, but for the longer term I’m worried about how many more client defections it can handle. At least this fund’s one-year returns are a solid top-quartile, so perhaps outflows will slow or stop. Last December, the fund paid out about 25% of assets under management as capital gains.

Taxes Follow Spikes in PCGE

p Average 3-Yr Tax-Cost Ratio

p Average PCGE 30

2.0

6

1.6

-18

1.2

0.8

-42

0.4

-66

12/2005

06/2007

12/2008

06/2010

12/2011

06/2013

12/2014

06/2016

Data as of July 2016.