Santa Claus is circling and about to drop some large year-end distributions on mutual fund shareholders. Few fund companies have warned shareholders of what’s coming, but at first blush many of the largest and most popular mutual funds are stuffed with capital gain exposure according to Morningstar.
- American Funds Growth Fund of America (AGTHX) 29%
- Dodge & Cox Stock (DODGX) 32%
- Fidelity Contrafund (FCNTX) 34%
International growth funds who have outperformed their domestic counterparts are sitting on even greater embedded capital gains.
- William Blair International Growth (BIGIX) 34%
- Artisan International (ARTIX) 34%
- Fidelity Diversified International (FDIVX) 35%
The mutual fund industry has been challenged during the past five years. First the bear market of 2000-2003 knocked investors for a loop. Next, the mutual fund scandal further hurt investor confidence. As a result, when shareholders took an accounting of their funds’ performance versus industry benchmarks, most were disappointed. This resulted in shareholders voting with their feet and a wave of fund closings and consolidation hit the fund industry.
Now, just when the bleeding seems to be slowing down, exchange traded funds (ETFs) have captured investors’ attention and wallets. In addition to better pricing, liquidity, transparency and performance better in-line with industry benchmarks, ETFs have very limited capital gain exposure. The coming wave of mutual fund distributions will make ETFs even more popular in 2007.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.