(PUB) Morningstar FundInvestor

November 2013

Morningstar FundInvestor

11

Caution: Tax Bill Ahead Red Flags | Greg Carlson

distribution equal to 16 . 3% of its net asset value to those who own the fund in a taxable account as of Dec. 16 . Janus Venture also got a new manager in May, as Jonathan Coleman took over when Chad Meade and Brian Schaub left the firm after a very successful tenure. Outflows have been fairly modest; $ 440 million was pulled out in July and August after their departure (flows stabilized in September). But the fund has been on a tear, gaining 17% in 2012 and another 31% in 2013 through Nov. 1 . Also, Coleman sold six stocks and added 18 to the fund during late May and June, leading to numerous position adjust- ments. The fund is estimated to distribute gains equal to 13 . 6% of its net asset value to fundholders in taxable accounts as of Dec. 16 . Longleaf Partners Small-Cap LLSCX This closed fund plans to distribute $ 4 . 91 per share in capital gains, or about 14% of net asset value, on Nov. 7 . Longleaf has said small caps look pricey, and it’s finding more to sell than buy. Hence the payout. Meridian Growth MERDX The team that left Janus Triton JATTX (as well as the aforementioned Janus Venture) took over this fund in September. The managers’ last Janus Triton portfolio had 12 names in common with Meridian Growth. The fund is estimated to distribute roughly 25% of its net asset value to those who own the fund as of Nov. 12 , 2013 . We are excited about the new team at Meridian, but taxable investors may want to wait to buy it. Calamos Growth CVGRX This fund expects a huge tax bill of about 25% . Inves- tors pulled a net $ 2 . 3 billion from the fund in the first nine months of 2013 ( 40% of its total assets at the start of the year), and the fund has gained 25% for the year through Nov. 1 . It made capital gains dis- tributions equal to 5% and 8% of its net asset value in 2011 and 2012 , respectively. Continued outflows in 2014 could spell more tax bills. œ Contact Greg Carlson at greg.carlson@morningstar.com

It’s that time of year again, when mutual funds begin to announce and then distribute capital gains to fund- holders. Vanguard says it will post its first capital gains estimates on Nov. 12 . Here are some funds that may make hefty distributions. Royce Low-Priced Stock RYLPX At first glance, this small-growth fund doesn’t appear primed to make a big distribution. It has struggled mightily since the start of 2011 , registering a slight loss from then through Oct. 18 , 2013 , while its typical peer has gained an annualized 14% . The fund also trades at a modest pace; portfolio turnover has aver- aged 23% annually over the past five years. But Royce announced in mid-September 2013 that the fund is estimated to make a distribution equal to 16 . 6% of its net asset value to those who own the fund in a taxable account as of Dec. 4 . Investors have pulled a net $ 2 . 5 billion from the fund since the start of 2011 , which means its realized gains are spread over a far smaller asset base ($ 1 . 8 billion). Janus Forty JACTX , Janus Venture JAVTX Manager changes can lead to big distributions of gains as new skippers reposition portfolios to their liking, and that appears to be the case at both of these funds. Douglas Rao took the helm of Janus Forty at the end of May 2013 from the departing Ron Sachs. While he only jettisoned three names from the compact portfolio by the end of June, he added eight new holdings and thus needed to adjust the weightings of a number of others. Combine those changes with the fund’s gains of more than 23% in both 2012 and in 2013 through Nov. 1 and with $ 1 billion in net outflows in the first three quar- ters of 2013 , and it’s not surprising that the fund was estimated on Sept. 16 to make a capital gains

What is Red Flags? Red Flags is designed to alert you to funds’ hidden risks. Such risks can take many forms, including asset bloat, the depar- ture of a solid manager, or a focus on an overhyped asset class. Not every fund featured in Red Flags is a sell, and in fact, some are good long-term hold- ings. But investors should be prepared for a potentially bum- pier ride in the near future.