Qn re: Reorg of Causeway International Opportunities Fund (CIOVX)

ibartman

David wrote in Sep 1 2014 Commentary:

The underlying funds [owned by CIOVX] ... are institutional shares of Causeway’s two other international funds – Emerging Markets (CEMIX) and International Opportunities Value(CIVIX) – so it’s hard to see how much gain investors might expect. The downside: the fund needs to entirely liquidate its portfolio which will trigger “a significantly higher taxable distribution” than investors are used to.

Years ago, the Vanguard International Index Fund started out as a fund-of-funds, holding shares of the European Index and Pacific Index Funds.

At some point, it, too, converted to a structure in which the fund held foreign shares directly.

Does anyone recall whether or not investors in Vanguard's International Index fund incurred capital gains distributions? If not, how did Vanguard do it? Clever timing (i.e., conversions incurred at a time when there was a loss), or something else? Thanks.

TheShadow

From the link in MFO post, http://www.mutualfundobserver.com/discuss/discussion/14903/causeway-funds-in-registration#latest,

the following information was posted in their SEC filing:

"...The Fund expects to pay significantly increased taxable distributions of net short-term capital gain (that is, the excess of short-term capital gains over short-term capital losses) and net capital gain (that is, the excess of net long-term capital gain over net short-term capital loss) in 2014 due to its conversion



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in October 2014 from a “fund of funds” structure to directly investing in portfolio securities. This is because when it converted, the Fund redeemed shares in underlying Causeway Funds that had appreciated from the time the Fund purchased the shares, causing the Fund to realize capital gain during 2014. Taxable investors receiving the distributions should be prepared to pay taxes on them (at ordinary income rates for the net short-term capital gain and, for non-corporate shareholders, at the 15% and 20% maximum rates mentioned above for the net capital gain). However, if you are investing in the Fund through a tax-advantaged retirement plan or account, or are a tax-exempt investor, there will be tax consequences to you from those distributions. "

VintageFreak

Need to remember to sell CIOVX...then buy it back after distribution

msf

ibartman said:

Years ago, the Vanguard International Index Fund started out as a fund-of-funds, holding shares of the European Index and Pacific Index Funds.

At some point, it, too, converted to a structure in which the fund held foreign shares directly.

Does anyone recall whether or not investors in Vanguard's International Index fund incurred capital gains distributions? If not, how did Vanguard do it? Clever timing (i.e., conversions incurred at a time when there was a loss), or something else? Thanks.

First, a clarification on funds. The fund you're referring to was (and is) Vanguard Developed Markets Fund. As you wrote, it used to hold two index funds. In late 2008/early 2009 it switched to investing directly in stocks. Earlier this year, Vanguard merged it into its Tax-Managed International fund, and called the resulting fund Developed Markets Index Fund.

AFAIK, there isn't/wasn't a fund called Vanguard International Index Fund. There was (and is) however, a Vanguard Total International Index Fund. That fund used to be comprised of three index funds - European Index (VEURX), Pacific Index(VPACX), and Emerging Markets Index(VEIEX) funds. (Tickers are correct - Vanguard invested in Investor class shares, not Admiral class shares.)

About half a year or so before Developed Markets was allowed to invest in individual stocks, Vanguard started the same transition for its Total International Index Fund. Vanguard announced the completion of that transition Feb 27, 2009.

Here's a Bogleheads thread on the Total Int'l Index fund transition. In it, the second poster quotes from the Vanguard announcement:

The change ... is not expected to result in capital gains distributions to shareholders.

So that's part of the answer to your question.

As to how, your guess may be correct. Note that these conversions took place late 2008 early to mid 2009, when most funds were sitting on large losses due to the market collapse. Clever timing indeed.

VintageFreak

Okay I have way too many things to worry about. Sell order in place for CIOVX.

ibartman

msf:

Thank you for your recollections re: history of Vanguard's conversions of it's international funds-of-funds to direct ownership. I think I was thinking of the Total Int'l Index Fund, but vaguely recall something similar with the Developed Mkts Fund.

Thank you again for the memories. (Those clever folks in Valley Forge!)