|
 U.S. investors in stock funds will take a big tax hit this year on
capital gains that could top $300 billion after portfolio managers
exhausted most of their loss reserves to offset several years of
stock market advances.
Even bigger tax bills may be coming the next few years too, after
President Barack Obama proposed during his State of the Union speech
on Tuesday raising the top capital gains and dividends tax rate to
28 percent, from 23.8 percent. The Republicans who control Congress
have promised to oppose such a change.
To be sure, to get hit with a big capital gains tax bill, there must
be big capital gains. But the rising toll on such profit will place
a spotlight on the different methods mutual fund companies use to
manage tax liability for shareholders.
"We believe it's not about what you make. It's what you keep,"
Boston-based Eaton Vance, which has nearly $300 billion in assets
under management, said in a report called "The Return of Capital
Gains," adding that many stock funds are run with too little regard
for investors' tax liability.
With the stock market hitting fresh record highs several dozen times
over the past two years, capital gains have been accumulating at
most mutual funds. The total return on the S&P 500 Index was 13.69
percent in 2014 and 32.39 percent in 2013.
The industry's gains for 2014 are expected to exceed the nearly $239
billion distributed by mutual funds in 2013, according to mutual
fund executives and analysts. The number of funds making capital
gains distributions jumped to 61.4 percent in 2014, from 57.5
percent in 2013, according to Lipper Inc, a Thomson Reuters unit.
Tom Roseen, head of Lipper research, said that preliminary
percentage could adjust higher.
Over the next several weeks, investors will receive a tally of their
capital gains distributions from U.S. mutual fund companies, whose
securities are among the only ones that require their owners to pay
capitals gains tax before they actually sell their shares.
Contrary to Eaton Vance, at larger cross-town rival Fidelity
Investments portfolio managers are encouraged to focus on total
returns and take tax efficiencies where possible, said Tim Cohen, a
chief investment officer of equities at Fidelity.
"That tax efficiency question is never going to be on the top list
of what we focus on," Cohen said. He added that capital gains can be
minimized by investing over a long time horizon, a core tenet for
Fidelity fund managers.
Funds that turn over their portfolios more frequently than peers
tend to put their shareholders at a disadvantage by producing a
higher percentage of short-term gains. Short term gains are taxed
the same way as ordinary income, whereas long-term gains - on
holdings kept in a portfolio for more than a year - are taxed at a
much lower rate.
[to top of second column] |
Fidelity said about 85 percent of its 2014 capital gains were long
term in nature. And 80 percent of customers at the company, which
manages about $2 trillion in assets and is the No. 2 mutual fund
company behind Vanguard Group, are in tax deferred portfolios such
as 401(k)s and other retirement accounts anyway.
STOUT RETURNS
Investors may not care so much about tax implications if they get
the sort of returns put up by Fidelity's $12 billion OTC Portfolio.
Run by portfolio manager Gavin Baker, the fund's 2014 total return
of 16.49 percent beat the S&P 500 Index by 2.8 percentage points and
its 2013 return of 46.5 percent beat the benchmark by a resounding
14 percentage points.
Baker's portfolio turnover tends to be higher than peers, producing
a higher percentage of short-term gains. Last year, 45 percent of
his fund's capital gains distributions were short term, or more than
double the estimated industry-wide average.
Fidelity's Cohen said tax efficiency moves are not always compatible
with producing total returns.
But sometimes they are. Oakmark Fund star manager Bill Nygren
highlighted a number of strategies he uses to dampen shareholder tax
liability. Since 2000, the Oakmark Fund's short-term capital gains
have been about half of one percent.
The Oakmark Fund's 3-year, annualized tax-adjusted return is 21.34
percent, slightly better than the 20.58 percent produced by Fidelity
OTC portfolio manager Baker. Both funds are better than 90 percent
of their peers on that measure, according to Morningstar Inc.
"We want to minimize the hole in the donut lost to taxes, but do so
without reducing the size of the donut," Nygren wrote in his most
recent market commentary.
(Reporting by Tim McLaughlin. Editing by Richard Valdmanis and John
Pickering.)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
