Ready for a big capital gains tax bill?

It’s that time of year again: capital gains distribution season. Fund companies are required to give investors an idea of ​​what their 2024 tax bills might look like by estimating how much of their funds will be distributed as income and capital gains later in the year.

Calendar year 2024 was another strong year for many asset classes. Large-cap growth funds have done well in the stock market as companies like Nvidia NVDA have benefited from the artificial intelligence boom. While large-cap stocks have lagged behind growth, they still delivered a total return of over 15% for the year, so their performance isn’t too bad either.

Given the ongoing trend of investors swapping actively managed equity funds for passive exchange-traded offerings, many managers are having to turn a profit to meet redemptions. Funds must pass on these long-term and short-term gains to shareholders, who, if they hold their funds in taxable accounts, must pay taxes.

Fund families are still releasing their estimates, which they may still be revising, but preliminary analysis suggests many strategies across the value growth spectrum will produce significant allocations. Most will pay out realized gains between the end of November and the end of the year.

This year, we’re highlighting the 50 highest capital gains distribution estimates (as a percentage of each fund’s net asset value, or NAV), followed by a selection of distribution estimates from many larger fund families (with links to full fund family lists if you’re looking for a specific fund ).

A common theme across most of these top 50 funds is outflows. Almost all of the funds in the top 10 have already experienced significant outflows in 2024, typically exceeding 30% of assets (based on total assets under management at the beginning of the year). In five of the ten largest companies, churn was more than 50%. We’ve generally used the oldest share class, but it’s important to pay attention to which share class you own. For example, Columbia Seligman Technology and Information’s SLMCX A share class is estimated to distribute approximately 14% of its NAV in capital gains; however, its Class C shares (SCICX) are estimated to allocate approximately 31% of its net asset value. Although both share classes receive the same payout dollar amount per share, the share classes have different NAVs and different start dates, which appears to result in large discrepancies.

Topping the list is Morgan Stanley Institutional Dynamic Value MAAQX, which is expected to distribute more than 50% of capital gains. Five other strategies allocate more than 40%. All of them lost approximately 50% of their assets in a year or more. Only one strategy in the top 10, American Century Disciplined Growth ADSIX, did not have significant outflows. The company only had about 10% of its starting net assets withdrawn, but the high annual portfolio turnover (often over 100%) likely forced some capital gains to be realized. The strategy is allocating approximately 34% of its net asset value this year.

Fund tracking indexes are also not immune to capital gains. For example, the Nationwide NYSE Arca Technology 100 Index (NWJCX) tracks the NYSE Arca Technology 100 Index, which is a price-weighted index, and is included in this list. Stock splits in generative AI winners such as Nvidia and Broadcom AVGO have seen their weightings in the fund drop significantly throughout the year. This has forced the strategy to realize large capital gains in these holdings, and the fund will distribute approximately 20% this year.

Other funds have undergone personnel or process changes that could lead to capital increases. For example, Ariel Global AGLOX will distribute approximately 20% this year. The strategy lost its star manager Rupal Bhansali late last year and has seen fund outflows of around 30% this year following her departure.

Why You Should Pay Attention to Capital Gains Distribution Estimates

If you invest in a tax-sheltered account such as a 401(k) or IRA and reinvest your distributions, distribution previews seem like a minor event because you won’t owe taxes until you sell your assets at exit. retirement and maybe not if you invest in a Roth IRA.

However, others have good reasons to pay attention. Investors in taxable accounts must pay taxes on earnings distributed even if they reinvest them, unless they sell losing positions to offset the gain.

Reinvested capital gains will help increase your cost basis, which can reduce the capital gains taxes you must pay when you eventually sell the fund. So, if you own a serial capital gains distribution fund, selling it in the future may cost less than you expected because of all the increases in cost basis that the regular distributions caused.

Taxable investors considering purchasing a fund that has been forecast to make a distribution should consider deferring the purchase until after distribution to avoid receiving a distribution without benefiting from any gain.

Tax considerations, of course, are only one of many factors when making an investment decision. Before trading, consult a tax advisor to avoid or receive a distribution.

(This report will be updated in late November as more firms like Vanguard release estimates).

Selecting stock company distribution forecasts