Are there going to be a lot of large capital gain distributions this year?
Phil Tetlock’s book “Superforecasting” provides a number of tools which can help us turn our wild guesses into reasonable predictions. Tetlock’s Superforecasters often started with a “base rate of similar occurring events” so let’s begin there. After tracking my own list of large capital gains distributions since 2014, I actually have some data to help select a base rate.
The average number of funds with gains in excess of 10% has been around 340. That’s my starting point.
I have three reasons why I think this year’s numbers should be adjusted upwards:
- There are gains on the books – We’ve had a decade of solid returns from the stock markets so funds have lots of gains to be realized and few losses available to offset these gains.
- Funds are seeing outflows and are forced to take gains – We continue to see flows out from mutual funds and into ETFs; these trades create additional realized gains for the remaining shareholders.
- Early numbers are in – Some fund firms have already provided their distribution estimates and these numbers are ahead of last year. Admittedly, this is a little like predicting the winner of a running race after the first lap.
So… I’ll play the role of a TV pundit and predict that we’ll see 478 funds with capital gains distributions higher than 10%.
Of course, (also like the pundits) I’ll have several reasons to explain why my prediction is off when this is the case. Either way, I think it makes sense to be monitoring your funds for large distributions and opportunities to save some tax dollars.