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.