Despite my better judgment, I make an official wild guess at the number of mutual funds that will make “large” distributions (more than 10% of NAV) every year. Nobody else is making predictions in this space, so I joke that I am the best prognosticator around. While my predictions have been reasonably good in most years, there have been years that I’ve been pretty far off. Fortunately, my guesses have been “directionally accurate” every year.

With any prediction, it’s a good idea to start with a baseline. Here are the historical numbers:

In an average year, we’ve seen 384 funds with distributions higher than 10% of NAV. Last year was very close to average.

Good news! It’s looking like taxpayers will be spared from large distributions in 2023. (Your mileage will vary.)

There are three primary reasons for this prediction:

1. Last year’s stock and bond market performance was terrible – It’s hard to have large capital gain distributions without capital gains.
2. Fund outflows continue, but not at an unusual pace – Mutual funds continue to see outflows, but this pace has been consistent.
3. Numbers are low for fund companies who have already reported – Roughly 20% of fund firms have already provided distribution estimates and the “big distribution” numbers are low.

These reasons lead me to predict that the 2023 season will see 80 funds with capital gains distributions higher than 10%.

If I’m close in my prediction, this will be the lowest year for big distributions since we started tracking this information. Unfortunately, this is little comfort if your funds (or your clients’ funds) are making sizeable distributions. Distribution planning still makes good sense.

 

For the last several years, I have been making guesstimates of the number of mutual funds that will make “large” distributions (more than 10% of NAV) for the year.  My predictions are consistently the best available, but that’s because nobody else is silly enough to venture a guess.  That being said, last year’s prediction was off by less than 1%.

With any prediction, it’s a good idea to start with a baseline.  Here are the historical numbers:

In an average year, we’ve seen 387 funds with distributions higher than 10% of NAV.  Last year’s numbers broke all records since we’ve been tracking big distributions.

I do have some reasonably good news … I’m expecting 2022 to be an average year.  

Here are my three primary reasons for this prediction:

1. Stock and bond markets have dropped substantially – It’s hard to have large capital gain distributions when there are few areas with capital gains.
2. Fund outflows continue – Mutual funds continue to see outflows.  Outflows often lock in capital gains.
3. Numbers are average for fund companies who have already reported – Some 15% of fund firms have already provided distribution estimates, and we’re seeing pretty average numbers.

These reasons lead me to predict that the 2022 season will see 456 funds with capital gains distributions higher than 10%.

If I’m close in my prediction, we’ll see a 40% decline from last year’s numbers. Sadly, any taxable distribution is going to be especially painful in a year without gains.

 

For the last several years, I have been making guesstimates of the number of mutual funds that will make “large” distributions (more than 10% of NAV) for the year.  My predictions are consistently the best available, but that’s because nobody else is silly enough to venture a guess.

With any prediction, it’s a good idea to start with a baseline.  Here are the historical numbers:

In an average year, we’ve seen 330 funds with distributions higher than 10% of NAV.  But, you can see how variable these numbers are from year to year.

We’ve been a little spoiled these last two years with very low numbers of these big distributions.  I’m sorry to predict that this year will be very different; in fact, I’m expecting the number of large distribution to be record-breaking for this year. 

Here are my three primary reasons for this prediction:

1. Markets have been on a solid run over the last 12 months – Steady market gains give fund managers few opportunities to perform some tax-loss harvesting pointing to higher capital gains distributions.
2. Fund outflows continue – Mutual funds continue to see outflows.  Outflows require selling.  Selling locks in capital gains.
3. Numbers are already high for fund companies who have already reported – Some 25% of fund firms have already provided distribution estimates, and we already see a huge number of funds with big distributions.  (Yes, I’m using the early results of the race to predict the outcome.)

These reasons lead me to predict that the 2021 season will see 795 funds with capital gains distributions higher than 10%.

If I’m in the ballpark, these numbers are almost 50% higher than 2018’s record numbers.  Ugh!

This is one year I’m hoping my predictions are way off.

 

I was asked to present a webinar on capital gain distribution strategies for the Financial Experts Network. The Network offers weekly webinars on a wide variety of financial topics.  I’ve been a subscriber to their content for the last year and was honored to be asked to be one of their presenters.

The webinar covered the following topics:

• 00:00  Financial Expert Network introduction
• 10:30  Capital Gain Distribution Basics
• 22:30  Things You (Probably) Don’t Know About Distributions
• 36:30  Tax Saving Strategies (Basic to Advanced)
• 51:00  Mark’s 2020 Predictions
• 60:00 Q&A

Click Here to Watch The Webinar

 

“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:

1. 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.
2. 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.
3. 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!