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 their funds will distribute in income and capital gains later this year.

Calendar year 2024 was another strong year for many asset classes. In stocks, large-cap growth funds performed well and companies like Nvidia NVDA benefited from the artificial intelligence boom. Even though large-cap stocks lagged behind growth, they still generated a cumulative return of over 15% for the year, so their results aren’t bad either.

With the current trend of investors swapping their actively managed equity funds for passive, exchange-traded offerings, many managers have had to realize gains to meet redemptions. Funds must pass this long- and short-term income to shareholders who, if they hold their funds in taxable accounts, must pay taxes.

Fund families are still publishing their estimates, which they may still revise, but a preliminary look shows that many strategies across the value growth spectrum will realize significant distributions. Most will pay out their winnings 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 NAV), followed by a sample of distribution estimates from many more fund families. (with links to complete lists of fund families if you are looking for a specific fund).

The common theme among most of these top 50 funds is capital outflows. Almost all funds in the top 10 have seen significant capital outflows so far in 2024, typically above 30% of their assets (based on total assets under management at the start of the year). Five of the top ten saw capital outflows above 50%. We generally use the oldest share class, but it is important to be careful which share class you own. For example, Columbia Seligman Technology and Information’s SLMCX A share class is estimated to distribute approximately 14% of net asset value in capital gains; however, its C share class (SCICX) is expected to distribute approximately 31% of its net asset value. Although both classes of shares receive the same dollar per share payment, these classes of shares have different net asset values ​​and launch dates, resulting in seemingly large discrepancies.

At the top of the list is Morgan Stanley Institutional Dynamic Value MAAQX, which is expected to distribute more than 50% in capital gains. Five other strategies distribute more than 40%. All lost about 50% of their assets over the year or more. Only one strategy in the top 10, American Century Disciplined Growth ADSIX, did not see significant capital outflows. She only saw about 10% of her initial net assets withdrawn, but the high annual turnover of her portfolio (often more than 100%) probably forced the realization of some capital gains. This year, the strategy distributes approximately 34% of the net asset value.

Fund tracking indices 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 on this list. With the stock splits of generative AI winners such as Nvidia and Broadcom AVGO, their weightings in the fund declined significantly over the year. This forced the strategy to realize significant capital gains on these securities, and the fund will distribute about 20% of them this year.

Other funds have undergone personnel or process changes, which could have generated capital gains. For example, Ariel Global AGLOX will distribute around 20% this year. The strategy lost its star manager Rupal Bhansali late last year and has seen around 30% exits this year following his 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 non-event because you won’t have to ‘taxes until you sell your assets in retirement and perhaps not at all if you invest in a Roth IRA.

There are, however, good reasons for others to pay attention. Investors with taxable accounts owe taxes on distributed gains, even if they reinvested them, unless they sold losing positions to offset the gains.

Reinvested capital gains help increase your cost basis, which could reduce the capital gains taxes you owe when you eventually sell the fund. So if you own a serial capital gains distribution fund, selling it in the future may cost you less than expected, due to all the basis price increases triggered by regular distributions.

Taxable investors considering purchasing a fund that has an expectation that it will pay a distribution should consider delaying the purchase until after payment to avoid obtaining distributions without the benefit of the earnings.

Tax considerations are of course just one of many factors to take into account when making an investment decision. Check with a tax advisor before trading to avoid or capture a distribution.

(This report will be updated in late November as more companies, such as Vanguard, release their estimates).

Distribution Projections of Certain Fund Companies