Dear Dagen: Kaufmann Fund Saddles Shareholders With Big Distribution

The pain never seems to end for investors in the (KAUFX)Kaufmann fund.

In addition to suffering through a year of paltry performance, shareholders were hit with a fat capital-gains distribution Nov. 11. (In a recent column, I suggested putting this fund out of its misery.)

The long-term capital-gains distribution amounted to $0.986 per share, or 17% of the fund's net asset value, before the distribution was made.

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By anyone's estimation, this distribution is big. It's particularly pathetic considering that the fund is up 4.4% this year.

Not only do shareholders have to pay the fund's exorbitant annual expense ratio of 1.95%, but they'll also owe taxes on this fund's realized gains.

"As another unhappy Kaufmann fund holder, I was unpleasantly surprised last week to see that they paid out a large distribution," writes reader Michael Cronin. "I was going to wait and try to get out before this happened; however, they got me. It's time to move on."

Dan Finkelstein also expresses dismay. "I, too, have held Kaufmann for about six years. Today, I see where they have declared a $0.986 capital-gain distribution. Doesn't that just put the frosting on the cake?"

Yes, it's another kick in the ribs for already-bruised shareholders.

In a year when funds and investors are newly obsessed with tax efficiency, Kaufmann's managers seem to have taken a pass on monitoring this very important factor for investors.

I'm utterly dumbfounded when fund managers can barely keep the fund in the black but still produce a fat taxable gain for shareholders to bear.

But it obviously happens.

A fund could theoretically be in the red for the year but still make a taxable distribution. It depends on how much a manager realizes in taxable gains during the year.

Any net gains must be distributed to a mutual fund's shareholders. A manager might be realizing gains by selling some stocks in the fund, perhaps to meet redemptions, while the remaining holdings lose money. In that scenario, shareholders wind up sitting on a taxable distribution and a negative return.

Redemptions could be one catalyst for the Kaufmann fund's distribution this year. By the end of September, $1.4 billion had poured out of the fund in net redemptions in 1999, bringing its assets down to $2.9 billion, according to Financial Research Corp. in Boston. By comparison, the fund was sitting on $6 billion in assets at the end of 1997.

Portfolio managers Lawrence Auriana and Hans Utsch did write a letter to shareholders addressing the distribution. But the letter merely addressed tax issues and offered no explanation or apology.

"The gain that you realize this year will increase your cost basis and thus reduce the amount of the gain that is subject to taxation whenever you sell your Kaufmann fund shares," it reads, in part.

The dispatch also includes a boilerplate statement that does nothing to quell tax concerns. "The Kaufmann Fund continues to follow the same investment philosophy and policies regardless of the overall market environment. It is important to know that we do not try to guess the price direction of our holdings, but rather try to buy those companies that are financially strong and rapidly growing with unique products and services in expanding markets. Our investment philosophy has always focused on long-term growth potential versus short-term speculation," the letter reads.

Shockingly, Kaufmann has done this before.

Last year, the fund made a distribution that was 11% of its NAV on top of a total return of 0.7%. That distribution wasn't quite as excessive as the recent one. However, it was still large enough that shareholders should have taken notice a year ago.

Maybe this year will do the trick.

More Deplorable Distributions

The Kaufmann fund is obviously not the only one that has made -- or will make -- a big distribution.

A few weeks ago, (ATCHX)Amerindo Technology made a capital-gains distribution equal to 30% of its net asset value. However, this fund has produced a return of 186% this year, making this payout far less painful.

If your fund has made a fat distribution, please tell me about it.

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