Legg Mason Value Trust have been gritting their teeth this year, and not just because the fund is down more than 9% in the past 12 months. This spring, shareholders were
hit with a capital gains distribution of about 9% of the fund's net asset value (NAV). And now they're about to get socked with another sizable distribution.
In a letter sent to shareholders Wednesday, Legg Mason said the $11.8 billion fund will distribute a long-term gain of between $7.50 and $8.25 in December. At yesterday's fund price of $62.93, that would be between 12% and 13% of the fund's NAV.
Given that the financial news media -- including
-- have talked at length about checking to see if a fund has made a distribution for the year before getting in, the notion of double whammies in one year by funds is an additional concern. While it's not unprecedented, it's also fairly uncommon. Because you won't know a second distribution is coming until it arrives, it might pay to call the fund company to find out.
"The flip side of being a good tax manager over time is you build up cap gains," says Christopher Traulson, a
analyst who covers Value Trust. "This is a painful hit, and unfortunate because it comes in a down year for the fund. But on the other hand, over time
skipper Bill Miller has shown he's pretty careful with the fund's tax efficiency. The question is, do you want him holding these stocks when he thinks they're fairly valued? Absolutely not."
Legg Mason Value Trust, one of the most highly regarded value funds, claims a top ranking among its peers for tax efficiency over three-, five- and 10-year periods.
Long-term gains are usually taxed at 20%. So if you owned 100 shares of the fund, and the distribution was $8, you'd pay $160 in taxes.
The fund family's lesser-known
Europe Fund and
Opportunity Trust will also distribute capital gains.
Traulson says the chief culprits behind the Value Trust distribution are the fund's sales of
, though lately Miller's been buying back into Dell.
People who own the fund as of Dec. 20 will be liable for taxes on the gains. Those who sold the fund before then would get to duck the taxes, but would also bail out of a fund with one of the best long-term records around. Fund manager Bill Miller is famous for having beat the
for nine years running, though it's not clear whether he'll maintain that
record this year. Legg Mason Value Trust ranks in the top 1% of funds for annualized returns over three-, five- and 10-year periods.
But for the more recent one-year period, the value fund languishes in the bottom 2% of its category, having lost more than 9%. For a value manager, Miller gained a reputation for being unusually enthusiastic about tech companies, but this year his big stakes in stocks like
and AOL have come back to haunt him.
While it's somewhat unusual for a fund to make two distributions in a year, funds from families such as
have done so over the past couple of years.
The latest disclosure from Legg Mason "may ultimately be in the best interests of investors," says fund consultant Geoffrey Bobroff. Nobody likes to pay taxes, but at least with the information in hand, investors have time to do some tax planning before the end of the year. For example, they may want to take losses elsewhere in their personal portfolio to offset the long-term gains in the Legg Mason funds. "In stocks, once I know a distribution's coming out of a fund, I could step up stock activity, should I be so inclined, and wipe out the gain," he explains. "That may cost me a commission, and it may cost me an opportunity, but that may be worth more than the tax liability."
If the fund family had waited until December to notify shareholders, he adds, there'd be much less time to strategize to reduce taxes, and shareholders might be selling at a time when others are also racing to do last-minute selling.