An early tally says stock funds' taxable capital gains distributions plummeted last year, offering ravaged investors modest solace after two down years.
Cap gains distributions from stock and bond funds totaled less than $40 billion last year, according to figures released Tuesday night by the New York fund consultancy Strategic Insight. That's well off the record $325 billion in cap gains shelled out in 2000, which added up to some 7% of stock and bond funds' assets. If the firm's estimate for last year is accurate, last year's distributions added up to less than 1% of funds' assets -- the lowest in 20 years.
The upshot for fund investors is that unlike 2000, when fund managers were still selling shares that were in the black, most won't be left in the unenviable position of paying taxes on a fund that's underwater. Because low distributions mean low taxes to Uncle Sam, the news should bolster support for legislation that would allow fund investors to defer paying cap gains until they actually sell their fund shares.
Some might be curious as to how they can end up paying capital gains taxes without selling shares. When a fund's trades add up to a net gain in a given year, it has to pay that money out to shareholders. Most investors reinvest these gains in additional fund shares, rather than taking them in cash. But if you don't own the fund in tax-deferred retirement accounts such as a 401(k) or IRA, you have to pay taxes on those gains.
Sources: Investment Company Institute, Morningstar, Strategic Insight.
And these taxes can add up, with the average investor paying a 20% tax rate on capital gains. For instance, if you owned 1,000 shares of a fund selling at $10 a share -- a $10,000 investment -- and the fund paid a $1 per share capital gains distribution, you'd owe Uncle Same $200 in April if you didn't have any offsetting losses. The erosive effects of these payouts led regulators to start requiring fund companies to disclose a fund's hypothetical after-tax returns in prospectuses and shareholder reports last year.
While no one likes to pay taxes, it's less painful if your fund is in the black. That mostly wasn't the case in 2000, when funds churned out record capital gains even as share values fell. The reason: Fund managers held few positions that were in the red after 1999's frothy gains. The past two years' losses have corrected the situation.
followed its 9% fall in 2000 with a 12% tumble last year. The
Fidelity Magellan fund, the nation's largest stock fund, has fallen 25% over the past two years, and the
T. Rowe Price Science & Technology fund, the largest tech fund at the start of last year, is down 74% over the past two years.
Given those bleak results, it's no surprise that more than 80% of stock funds didn't kick out a capital gain, according to
. That said, there were some bombshells. Thanks to a spate of redemptions, the
John Hancock Regional Bank fund paid out a capital gains distributions that added up to more than 10% of the fund's assets in December.
As usual, the value of tax-deferred accounts is borne out around tax time. Because the lion's share of mutual fund shareholders own their shares in these accounts, only some $16 billion of last year's distributions were paid out in taxable accounts, according to Strategic Insight.
The Definition of Chutzpah
There's a fellow named Michael Murphy who, despite a truly dismal record as a fund manager, keeps spamming investors about his latest picks.
Murphy's emails, replete with grammatical and spelling errors, urge recpients to sign up for a free trial of his
newsletter. I'll refrain from linking to Murphy's site, where you'll find a biography touting him as "America's premier technology stock analyst" and former head of an unnamed software company. He's the author of
Every Investor's Guide to High Tech Stocks and Mutual Funds
and pens two other newsletters, the
California Technology Stock Letter
. Murphy hadn't returned a call seeking comment as of Wednesday afternoon.
On his site, Murphy, a Harvard grad who's no stranger to the investment conference circuit, touts a 66.4% cumulative return since starting his newsletter in late 1998, though no specific dates are provided on his bio page. That looks good vs. the
, but it doesn't really match up with the returns of his two tech funds, two of the wormiest apples in that ravaged bin.
Monterey Murphy New World Technology fund, which he's run since its 1993 launch, averages a stunning 20% annual loss over the past five years, compared with a 6% annual gain for its average peer. That's dead last among all tech funds, according to Chicago research house Morningstar.
Monterey Murphy New World Core Technology fund, which lives in the convertible bond fund category, has amassed an equally stunning record. Murphy started running the fund in 1996, and it averages an annual 7.5% loss over the past five years.
Adding insult to injury, both funds carry a 1.99% annual expense ratio, well above their average peer's 1.73%. A subscription to this guru's newsletter costs $195 per year, though it's only $375 for two years.
What a bargain.