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20 Popular Funds That Could Sock Clients With Hefty Tax Bills

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It’s that time of year when clients seeking to manage their portfolio’s tax bill need to look into their mutual funds’ estimated capital gains and the dates the companies will distribute them.

Those distributions will be big in many cases, as investors have continued to pull assets from mutual funds in 2023, prompting managers to sell assets to cover those payouts.

“The outflow story continues here,” Stephen Welch, senior manager research analyst at Morningstar Research Services, said in a recent interview, noting that investors have been transferring money from traditional mutual funds to exchange-traded funds for years.

At the same time, retirees are making withdrawals and redeeming shares, also contributing to fund outflows, he said.

“Since investors continued to pull money from traditional actively managed funds in the first nine months of 2023, many managers had to realize gains to meet redemptions,” Welch wrote in a recent Morningstar column. “Funds must pass those long- and short-term proceeds to shareholders who, if they own their funds in taxable accounts, must pay taxes.”

Some funds with positive flows also expect to make sizable capital gains distributions.

Fund companies have started listing capital gains estimates on their websites, with most planning to make distributions late this month through year-end, Welch noted. Companies may revise their estimates, he wrote.

“A lot of them have seen sizable outflows, he told ThinkAdvisor, noting that Delaware Ivy Value (IYVAX) has experienced a nearly 50% outflow this year, as of Sept. 30, and estimates it will make a 29% capital gains distribution in December. 

“That’s a sizable chunk of the fund that has gone out the window this year,” Welch said.

Investors who own shares at the close of business on a fund’s record date will receive the capital gains distribution, mutual fund company websites say.

Clients who want to sell a money-losing fund and avoid the capital gains distribution would need to do so before then.   

“You have to look at your own situation,” Welch said, noting various moves an investor could make, including tax-lost harvesting from elsewhere in accounts, to avoid or mute taxes from a mutual fund’s capital gains.

A client looking to make an investment before year-end could consider an ETF instead, or wait until after capital gains payouts to invest in a desired mutual fund that’s planning a big distribution, he said.

Investors can check mutual fund company websites for estimates from particular funds.

Check the gallery for a list of the largest estimated 2023 capital gains distributions from mutual funds with $10 billion or more in assets under management as of Sept. 30, according to Morningstar. (Funds varied in the dates they supplied the estimates.) Morningstar expects to update capital gains data this month.

Slides: Chris Nicholls/ALM