Webinar Replay – Mutual Fund Capital Gains: Reducing Salt In The Wound

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 couple of years and was honored to again be asked to be one of their presenters.

The webinar covered the following topics:

  • 00:00  Financial Expert Network introduction
  • 1:00  Capital Gain Distribution Basics
  • 19:00  Things You (Probably) Don’t Know About Distributions
  • 30:30  Tax Saving Strategies (Basic to Advanced)
  • 43:30  Mark’s 2022 Predictions
  • 47:00  How CapGainsValet Can Help (site overview)
  • 55:30 Q&A

Click Here to Watch The Webinar

 

2022 Predictions

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.

 

Webinar Replay: Tax Saving Strategies

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 couple of years and was honored to again be asked to be one of their presenters.

The webinar covered the following topics:

  • 00:00  Financial Expert Network introduction
  • 2:00  Capital Gain Distribution Basics
  • 20:30  Things You (Probably) Don’t Know About Distributions
  • 29:00  Tax Saving Strategies (Basic to Advanced)
  • 42:30  Mark’s 2021 Predictions
  • 46:30 Q&A

Click Here to Watch The Webinar

 

2021 Predictions

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.

 

2020 Predictions

At this point in the year, the most common question I get is, How bad are fund distributions going to be this year?

Despite my better judgment, two years ago, I started to make predictions of the number of “large” distributions we’ll find each season.  So far, my predictions have been reasonable – off 13% in 2018 and off 7% in 2019.  Since nobody else is making these types of predictions, I often claim these are consistently the best predictions available.

With any prediction, I think we need to start with a baseline.  Here are the historical numbers:

In an average year, we’ve seen 350 funds with distributions higher than 10% of NAV.  But, you can see how variable these numbers are from year to year.

2019’s numbers were on the low side.  I’m expecting the number of large distribution to continue to be on the lower end for 2020.  Here are my two primary reasons:

  1. 2020 provided opportunities to take tax-losses – For obvious reasons, we saw huge stock market declines earlier this year.  I expect this decline provided mutual fund managers the opportunity to perform some tax-loss harvesting that’ll result in more reasonable distributions.  I know I was able to “make lemonade out of lemons” with some loss harvesting I did for my clients in the first quarter.
  2. We see reasonable numbers from those who have already reported – Some 15% of fund firms have already provided distribution estimates, and large distribution counts are similar to last year.  (I’m using the results from the beginning of the race to predict the final outcome.)

These reasons lead me to predict that the 2020 season will see (drum roll, please) 170 funds with capital gains distributions higher than 10%.

A lower than average number of these distributions is great for financial advisors and investors.  I’m crossing my fingers that my estimates are close.

 

 

Webinar Replay: Tax Saving Strategies

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

 

Inevitable Distributions?

Earlier this year, I decided to build a list of mutual funds that were surely going to have large capital gains distributions.  After all, mutual funds with large shareholder redemptions and large embedded gains would have to end the year with large capital gains distributions.  Makes sense, right?

So I searched, sorted, and crunched some numbers to build my Inevitable Distribution List.  I limited the list to the most likely 20 funds.  (I won’t share the list to protect the innocent.)  On average, these funds lost 45% of their assets to shareholder redemptions and they had average embedded capital gains of 40%.

Well… it turns out that my assumptions were not entirely correct.  Ok – my sure bets were not sure at all.

As you can see from the chart above, while half of the funds on my list are expecting distributions higher than 10%, the other half of my list was mostly ignorable.  Yes, my work was better than throwing darts but not as insightful as I expected.

My bottom line – Looking ahead at fund outflows is not worth the exercise.  Instead, spend your time gathering capital gains estimates for all of your holdings to make sure there are no surprises.

2019 Predictions

“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!

2018 Predictions

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:

  1. 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.
  2. 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.
  3. 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.

 

 

photo credit: N@ncyN@nce The amazing Zoltar via photopin (license)</

Predicting 2017’s Capital Gain Distributions

“How painful will this year’s capital gains distributions be?”

Warren Buffet once quipped: “Forecasts usually tell us more of the forecaster than of the forecast.”  This is one reason I hesitate to forecast what we might see this year for capital gains distributions from mutual funds.  Nonetheless, I’ll reveal a little about myself and will make an educated guess.

Looking Back

I don’t track absolute dollars of fund distributions, but for the last four years I have counted the number of funds that have “large” (more than 10%) capital gains distributions.  As you can see from the chart below, the trend has been favorable to taxpayers.  2014 had over 500 funds that distributed more than 10% in gains.  Last year, barely 100 funds were in that category.

Initial Thoughts

Larger than average fund distributions are generally driven by two factors:

  • Gains – We’ve seen nine nice years of market gains, so it’s no surprise that funds (especially US equity funds) have gains on their books. As funds make trades to rebalance and take profits, they realize taxable gains that must be distributed to fund owners.
  • Fund Liquidations – The last several years has seen a large move away from actively managed mutual funds and into index mutual funds and ETFs. Last year, active managers running US equity funds saw over $260 million in fund outflows and we are seeing similar numbers this year too.  Managers in these funds have to raise cash, and that means selling holdings. This results in realized taxable gains.  There is very little a fund manager can do to be tax efficient in this situation.

Given these two factors, I’m guessing we will see a solid number of large fund distributions in 2017.  My early thoughts were that we’d see numbers somewhere between what we saw in 2015 and 2016.

Where are we now?

As I write this, nearly 30% of the fund firms in my extended database have released their capital gains estimates and the results are interesting.  We are on pace towards 2014’s numbers, and could end up with a year with over 500 funds making 10%+ distributions.  Unfortunately, this doesn’t look like it’s a year where we’ll be able to skip paying attention to fund distributions.

 

 

 

 

 

 

photo credit: Neil Tackaberry wizard via photopin (license)