(PUB) Investing 2015

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17 Morningstar FundInvestor December 2015
3 Rebalancing Without Considering the
Tax Consequences
Year-end portfolio reviews often entail rebalancing—
trimming highly appreciated securities while boosting
positions in securities that have fallen in value.
Adhering to a consistent rebalancing regimen can
reduce a portfolio’s risk level while also building
in a contrarian streak. But even though rebalancing
is sensible from the standpoint of portfolio optimi-
zation, it has the potential to jack up transaction and
tax costs. That’s one reason why it’s usually advi-
sable to concentrate any rebalancing activity in tax-
sheltered accounts like IRAs and 401(k)s, where
trading costs are low and selling doesn’t trigger a tax
hit. On the flip side, it’s worth employing a lighter
touch in taxable accounts.
4 Buying Ahead of a Distribution
If a portfolio review indicates that you’re light on
certain asset classes, categories, or sectors, be careful
about what you add to correct those imbalances
during the fourth quarter. That’s because mutual fund
capital-gains-distribution season is upon us, and if
you add a holding to your taxable account before it
makes a payout, you’ll be subject to taxes on gains
you weren’t around to enjoy. If you want to make
adjustments straightaway, a better bet is to focus on
broad-market index funds and ETFs, which tend to
do a good job of limiting taxable distributions.
5 Reflexively Dodging Capital Gains Distributions
If you expect a fund that you’ve owned for a while
to make a sizable distribution and you hold it in a
taxable account, selling pre-emptively can make sense
if you wanted to lighten up on the position anyway—
if it’s taking up too large a share in your portfolio, for
example. But if you like the holding and weren’t
planning to sell, it’s rarely a good idea to preemptively
sell a long-held position. After all, you’re apt to
have your own capital gains in the fund, so even if
you were to sell in time to avoid the distribution,
your selling would trigger capital gains taxes based on
the difference between your purchase price and the
current share price.
Capital Gains Update
It’s capital gains season. Here’s what we’ve heard
so far:
American Funds
American Funds Growth Fund of America AGTHX
is anticipating one of the larger distributions, amount-
ing to between 8% and 10% of assets. American
Funds Investment Company of America AIVSX is
estimating a distribution of between 7% and 9% of
net asset value, while American Funds New Economy
ANEFX and American Funds Smallcap World
SMCWX are both anticipating distributions in the
range of 6% to 9% of NAV.
Fidelity
Among the Fidelity funds that are anticipating capital
gains distributions, many amount to less than 5%
of NAV. However, a handful of larger funds will be
making more meaningful distributions, including
Fidelity Capital Appreciation FDCAX with 11% of
NAV and Fidelity New Millennium FMILX with
10% of NAV as of Sept. 30.
T. Rowe Price
T. Rowe Price Growth & Income PRGIX, which had
a manager change earlier this year, is anticipating
a distribution of about 14% of its NAV . T. Rowe Price
Small-Cap Value PRSVX is anticipating a distribution
of $7 per share, or 15% of its recent NAV.
Vanguard
Among the Vanguard funds anticipating a sizable
capital gains distribution later this year is Vanguard
Explorer VEXPX; the firm expects a roughly 9%
distribution as a percentage of NAV from the fund,
which also made a sizable distribution in 2014.
Vanguard Strategic Equity VSEQX anticipates a
distribution in that same ballpark of 9% of NAV.
Vanguard Capital Value VCVLX and Vanguard U.S.
Growth VWUSX expect to make capital gains distri-
butions that amount to roughly 8% of their NAVs,
while Vanguard Diversified Equity VDEQX, Vanguard
Mid-Cap Growth VMGRX , and Vanguard Morgan
Growth VMRGX are each forecasting distributions in
the 7% range. K
Contact Christine Benz at
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