At $12.1 billion
Legg Mason Value Trust, it's out with the tech -- and in with the taxes.
sent Value Trust shareholders a letter warning that the fund will pay a taxable long-term
capital gains distribution of $5 to $7 a share on June 29. The reason: Skipper Bill Miller is selling old tech favorites such as
and putting that cash to work in Old Economy stocks.
Miller's fund is the only one to beat the
for each of the past nine years, so shareholders who have held the fund for a few years can balm the wounds of any tax hit with the mountain of outsize returns.
But, the tax hit will take a bite. For most investors long-term capital gains are taxed at 20%. So, ignoring any tax selling you might do ahead of time, if you own 100 shares of the fund and the cap-gains distribution is $6, you'll owe Uncle Sam $120. And for people who purchased shares more recently, they have the misfortune of paying taxes on gains reaped by others. The upshot for would-be buyers: Wait until July, and avoid the tax implications.
When a fund's stock sales result in more profits than losses, it realizes gains that the fund is obligated to distribute to shareholders, who are liable for capital-gains taxes on that money. Capital-gains distributions are considered large when they top 5% of a fund's
net asset value or share price. A $7 distribution would be more than 9% of Value Trust's net asset value.
"Much of the excess returns earned by Value Trust shareholders in the past several years has been due to our being early in investing great businesses such as AOL, Dell and
. The prospects for these and most other prominent technology companies are now well recognized and well discounted by the market," Miller wrote to Value Trust shareholders in his March 31 letter to shareholders. Legg Mason didn't return a call for comment on the distribution.
Miller's moves reflect that sentiment. A year ago, AOL had appreciated to a whopping 18% of the fund's portfolio, but at the end of April its weighting was about half that. Miller has also reduced his position in Dell and removed biotech bellwether
noted these moves in a May 20
Miller's used the cash from the fund's tech-selling spree to add decidedly Old Economy stocks such as
, which process garbage and data, respectively. He has also built up positions in financial stocks such as
Bank of America
, according to the March 31 report.
Long-time shareowners are finally paying for the significant gains they've earned over the years. Due to Miller's low-turnover approach the fund has ranked in the top 1% of large-cap value funds for tax-efficiency, according to
, which named Miller Manager of the Year in 1998.
More recent investors are probably not as thrilled. The fund's 21.2% 10-year annualized return beat 99% of the fund's peers and also the S&P 500. But the tech-stock dip has hurt the fund this year. Since Jan. 1, the fund is down 0.7%, trailing its average peer and the S&P 500. The double whammy of a performance hiccup and a fat cap-gains distribution is hardly good news.
Still, Miller's past success provides a compelling reason to hold the fund. These moves, which seem costly now, could pay off. The five new entrants noted here are up an average of 6.8% this year, compared with 0.5% for the S&P 500.