“Mr. Wilson, are there going to be a lot of large capital gains distributions this year?”
First, please don’t call me Mr. Wilson – that’s my father’s name.
Second, my 2018 guess was in the right range, but off by 11%. Predicting specific numbers is very difficult.
Third, I’m always happy to provide an opinion, so thank you for asking.
Before presenting my guess, let’s look at how the last several years have stacked up. The chart below shows the range of “large” fund distributions in the previous five years. The average is around 380, but the range is enormous!
As you can see from the chart, 2018 saw the highest number of large distributions since I started tracking them. These numbers are likely the result of nine impressive years of stock market gains as well as the record amount of dollars that are leaving mutual funds.
Expectations are that 2019’s numbers will look similar to 2018. After all, the stock markets continue to reach new highs and mutual funds are still seeing huge outflows.
Despite these reasons, I think we will see a substantial reduction in these “large” distributions for three primary reasons:
- 2018 provided opportunities to take tax-losses – Although losses for 2018 were not too painful, we did see a 20% stock market decline at the tail end of the year. This decline might have provided the opportunity for mutual fund managers to perform some tax-loss harvesting that’ll result in more reasonable distributions.
- Fund managers might have learned a lesson – Large capital gains distributions can lead to very large fund redemptions. For example, some funds on last year’s Doghouse List saw multi-billion-dollar redemptions. I’m hoping tax-efficiency became more of a focus for fund managers because of these huge redemptions.
- Early numbers are in – A handful of fund firms have already provided distribution estimates, and these numbers are much lower than last year. (85% of firms have yet to provide distribution details, so this could easily turn around.) As a distributor of capital gains information, this is not great news. As a financial advisor and investor, this is great news!
All of these reasons lead me to predict that this season we will see 219 funds with capital gains distributions higher than 10%.
Climatologists and economists are not very good at longer-term forecasting. I’ll follow their lead and adjust my forecast as more information becomes available. Stay tuned!