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What indicators are there, if any, that a mutual fund will likely make capital gain distributions later during the year? Is there any technical indicator one could use to predict the size of those distributions?
IMHO the only somewhat reliable indicator is if there's been a management change to a new manager with a different investing style. For example, I'd expect a larger distribution with a management change at Fidelity than at T. Rowe Price where there's an effort at smooth transitions and continuity.
The larger distributions this year (2015) were not unexpected, because the market went up so much in 2014 and funds didn't seem to distribute much that year. That meant they were sitting on securities that had gone up a lot, and so were candidates to be sold off in 2015.
But ... while funds tended to have larger than average distributions, there were some funds with outsized gains, and I couldn't even guess at any common factor. So I'll beg off regarding indicators of size, beyond what I've already described.
More generally, you can look at figures like M*'s tax cost ratio to get a sense of a fund's typical distributions. That should correlate somewhat with turnover. I don't find a fund's unrealized capital gains particularly predictive - a fund may own the same appreciated securities for many years, even as it trades in and out of others.
@rlyke12 Indicators of size...hmm, that's a toughy. And I would agree with msf that unrealized CGs (and, for that matter, unrealized losses) aren't very useful either. However, there is a situation where you can tell, if you notice sizeable CGs building up in a fund and are using that as a reason to get out or not invest in it, whether concern about a large CG distrubution is warranted. But you have to be willing to do the homework!
Let's say a fund has a bad year, or has a so-so year, with some or a lot of capital losses but no CGs realized. Rather than let the realized losses go to waste, mutual funds can "carry them forward," for many years (up to 5?), but they have to designate to the IRS how much and in which years they will be used. So, let's say a fund's bad year was 2010, with realized losses of $200M; they designate future usage of $50M for 2013, $70M for 2014, and $80M for 2015. You come along as an interested new investor in the fund in 2015, but see that fund has had a good 4 yr run and appears to be in harvesting mode, i.e. realized CGs are up to $50M, and it's only June. Maybe you should wait until Jan., you think, to avoid the tax hit. After all, why should you pay tax on someone else's CG?
And that is where all that minutia, in the SAI and in the back pages of the annual and semi-annual reports becomes quite relevant to your concern. Losses carried forward to what years are listed in detail there. So, in the above example, you go to the SAI, find this "old history" of which you were unaware, and find out that CGs tax is not one of the variables in play for deciding whether you should invest now or wait--- for 2015, most all of it is gonna be cancelled out at year's end.
Large outflows can also trigger realization of capital gains.
However, predicting which funds will make distributions is also complicated by the fact that some funds are aware that their large embedded capital gains are being watched and deterring investors from investing in those funds. So, what these funds then do is periodically realize their capital gains so that future investors are not deterred by the size of their embedded cap gains.
Large outflows turn out to be a double whammy. Funds may be forced to liquidate securities with formerly unrealized gains, and those gains get divided among fewer remaining shares.
Comments
The larger distributions this year (2015) were not unexpected, because the market went up so much in 2014 and funds didn't seem to distribute much that year. That meant they were sitting on securities that had gone up a lot, and so were candidates to be sold off in 2015.
But ... while funds tended to have larger than average distributions, there were some funds with outsized gains, and I couldn't even guess at any common factor. So I'll beg off regarding indicators of size, beyond what I've already described.
More generally, you can look at figures like M*'s tax cost ratio to get a sense of a fund's typical distributions. That should correlate somewhat with turnover. I don't find a fund's unrealized capital gains particularly predictive - a fund may own the same appreciated securities for many years, even as it trades in and out of others.
Indicators of size...hmm, that's a toughy. And I would agree with msf that unrealized CGs (and, for that matter, unrealized losses) aren't very useful either. However, there is a situation where you can tell, if you notice sizeable CGs building up in a fund and are using that as a reason to get out or not invest in it, whether concern about a large CG distrubution is warranted. But you have to be willing to do the homework!
Let's say a fund has a bad year, or has a so-so year, with some or a lot of capital losses but no CGs realized. Rather than let the realized losses go to waste, mutual funds can "carry them forward," for many years (up to 5?), but they have to designate to the IRS how much and in which years they will be used. So, let's say a fund's bad year was 2010, with realized losses of $200M; they designate future usage of $50M for 2013, $70M for 2014, and $80M for 2015. You come along as an interested new investor in the fund in 2015, but see that fund has had a good 4 yr run and appears to be in harvesting mode, i.e. realized CGs are up to $50M, and it's only June. Maybe you should wait until Jan., you think, to avoid the tax hit. After all, why should you pay tax on someone else's CG?
And that is where all that minutia, in the SAI and in the back pages of the annual and semi-annual reports becomes quite relevant to your concern. Losses carried forward to what years are listed in detail there. So, in the above example, you go to the SAI, find this "old history" of which you were unaware, and find out that CGs tax is not one of the variables in play for deciding whether you should invest now or wait--- for 2015, most all of it is gonna be cancelled out at year's end.
However, predicting which funds will make distributions is also complicated by the fact that some funds are aware that their large embedded capital gains are being watched and deterring investors from investing in those funds. So, what these funds then do is periodically realize their capital gains so that future investors are not deterred by the size of their embedded cap gains.
Also international funds that use currency hedging also have larger distribution on dividend.