FYI: In general, investing taxable money in active stock funds is a bad idea.
This was vividly underscored last week by Harbor International Fund’s (HAINX) announcement that it expects to make a huge capital gains distribution equivalent to roughly 38% of the fund’s net asset value.
There are lessons to be learned from the Harbor fund’s example, such as giving a wide berth to active stock funds that are sitting on large unrealized gains while experiencing heavy investor outflows.
Regards,
Ted
https://www.morningstar.com/articles/880662/taking-a-bath-lessons-from-a-big-funds-9-billion-c.html
Comments
More likely, it was Ivy, not Northern Cross that had no succession plan. I don't believe Ivy was expecting Castegren to quit. It plunked Reilly in as manager for 1.5 years, followed by McLachan for another year. Only then did it settle on a long term manager with Mengel. In those intevening couple of years, IVINX returned -17.26% (2000), -21.03% (2001), and -20.96% (2002).
In comparison, HAINX had returns of -4.97% (2000), -12.25% (2001), and -6.38% (2002).
For a frame of reference, TEMFX had returns of -3.67% (2000), -7.92% (2001), -8.64% (2002).
Northern Cross had a succession plan in place. For almost two years before Castegren died, starting Feb 2009, Castegren was joined by Ducrest, LaTorre, and Wendell. For the two years of overlap, and the two years following, HAINX put up good to very good numbers: 17th percentile (2009), 31st percentile (2010), 17th percentile (2011), 17th percentile (2012).
Those managers did not maintain their fine performance. However, the succession was planned and the fund continued to perform well through the transition.
The lesson to be learned is when a fund does not have a smooth succession plan (successful or otherwise), you may expect a portfolio overhaul and large amounts of cap gains realized. Harbor just fired Northern Cross. That's what caused the gains to be realized.
https://www.morningstar.com/articles/880213/harbor-international-under-review-after-subadvisor.html
That said, even if the gains you recognize will be greater than the distributions, this would be the time to sell the shares if you want out. With new management and a new portfolio, HAINX is effectively a new fund. Is this new fund one you want to own in preference to another fund (or cash)? I haven't researched the new management, so I can't comment on the new fund. There are other good, known funds available as alternatives.
Another way to avoid the gains is to donate the shares to charity. With the new tax laws, it's less likely you'll be able to itemize, but if there are donations you were planning to make anyway, this is a good way to do that.
I used to own the fund until it became a stinker. I think this was a fund that gave off “sell” signals a long time ago. I wish all my sales had been so prescient.
Thanks for feedback. If i sell now do you know if I'll still get hit with the cap gains distributions they'll do later in year? That would be a double whammy of my cap gains plus the distributions from the fund
Still, I agree that the vast majority if not all of the net cap gains realized will be long term. That's for a few reasons:
- Very low turnover (13%), so on average, investments have been held for 4 years. Think of a portfolio filled with investments held 8 years then sold; half will be under 4 years old at the moment, half more. In any case, very few holdings owned for under a year.
- Net losses this year; YTD performance -2.73%. So holdings purchased this year may easily have dropped in value; at least enough so that short term losses should wipe out any short term gains.
- New management building a new portfolio - it's very unlikely that the new management is buying securities now just to dump within the fiscal year. They're not about to generate additional short term gains with their own purchases.
Here's the source for M*'s estimated 38% distribution.
https://www.harborfunds.com/HIF_manager_change_QA.htm#7
It's worth keeping in mind the dollar amount of the expected distribution, more so than the percentage. Harbor estimates that $9B will be distributed in cap gains: $4.5B already recognized, and nearly all of the $4.5B unrealized gains are expected to be realized.
The current AUM of the fund is $20.8B, so that comes out to 9/20.8 = 43%. (This is just slightly higher than the 41% one gets by taking Harbor's high end distribution of $27 and dividing by the current NAV of $64.94.)
So watch that AUM. As it drops (people sell), the $9B won't change, but the denominator will get smaller and smaller.
If you sell now and others don't, the AUM of the fund declines, and they get hit with even higher distributions. That $9B in gains is distributed among fewer owners (i.e. fewer shares).
(Each time I edit, I keep on thinking of more to write; let me know if a hypothetical numeric example would help.)
Either way, your gross income will be the same (except for potential appreciation/loss while waiting to sell). But in terms of tax you're better off selling now.
Sell now, and virtually all your income will be long term capital gains (except for any shares purchased within the last year, and those probably lost value).
Wait for distributions, and a small amount of the distribution may be ordinary income (vs. long term cap gains or qualified divs).
No other real difference. Sounds like you want to get out. So get out now, while the getting is good.