Over at Mutual Fund Observer we came across the following discussion: Need Assistance For Making Portfolio More Tax Efficient
Based on the capital gains distributed on several of my funds held in taxable accounts, I would like to make my taxable portfolio more tax efficient. I have a fairly high value account overall, with approx. half a million dollars in taxable accounts. They include large stakes in Vanguard Wellington, Berwyn Income, Fidelity Contrafund, Fidelity Low Priced Stock, Artisan Global Value, Scout Mid Cap, Yacktman Focused and FMI International. Some of these funds had very hefty capital gains distributions which will cause some heartburn during tax season. Do you have any suggestions on how best to substitute some of these holdings with more tax efficient ETFs or Index Funds? I'm not too concerned with slightly lower performance if the fund is more tax efficient. Thanks.
Comments
Mike_E
2013 was a fantastic year. If funds were still sitting on realized but undistributed losses going back to 2008, they all but surely used them up that year. (Funds are required to distribute substantially all of their net gains each year, but if they have losses, they can't distribute them. Instead, they are allowed to use them against gains in future years - I believe for up to ten years.)
Follow that with an above average 2014 (domestically, anyway), and you've got the makings of disproportionately large distributions. It pays to keep things in perspective. For example, FMIJX (FMI Int'l) is in the 2nd percentile for 3 year after tax returns (excluding this year). And this is a very concentrated fund (29 stocks, plus some other securities) - do you want to replace it with a fund that has a gazillion holdings?
Don't overreact to one year's taxes and lose sight of the objective - net return, not minimizing taxes. The latter is easy - don't make money.
If you sell your shares, you'll wind up paying more taxes now (gains on the shares). If you want to make some moves, you might consider taking the distributions in cash, and investing them in newly selected funds.
I would be more inclined to use Vanguard than Fidelity for broad based stock index funds. They tend to have lower cap gains distributions (e.g. Spartan 500 made cap gains distributions this year and in 2007), Spartan Total Market made cap gains distributions in 2007-2010). You don't see these in the Vanguard funds. (Also, the Vanguard funds have ETF shares, so they have the tax advantages of an ETF, with no bid/ask spread.)
Your points are well taken and I will certainly take a look at some of those Vanguard ETFs and indexes.
I am in the 25% tax bracket, BTW.
The portfolio is value-leaning, non-large cap, low turnover (12%), 1/3 foreign. IMHO, it's that last factor that explains the relative underperformance the past few years. It's a global stock in all but M* classification. Which is not a bad thing if that's what you want. For that sort of fund, it's doing quite well.
I think I finally did find a possible alternative. Polaris Global Value (PGVFX). But here's the thing - it is classified a global stock, and is somewhat more heavily foreign weighted (60/40 foreign/domestic).
Having more foreign stocks, it doesn't match FLPSX in performance - but it does tend crudely track the same performance curve, and it helps if one wants/needs a bit more foreign exposure. (Since domestic stocks have been outperforming foreign ones, a person's portfolio could easily have tilted "too much" toward domestic.)
It's more tax efficient (both relative to FLPSX, though this may be because it is still sitting on losses from 2008-2009 (per website). On an absolute basis), it falls into the same mid cap value box (though with slightly higher average market cap). Same low turnover (14%).
This has been a fund on my radar for years, but I always considered it too expensive (and in the past have been disinclined to buy global funds). But it has temporarily lowered its ER (it remains to be seen whether the temporary reduction will be renewed).
Finally, unlike FLPSX, one can benefit here from a foreign tax credit. The rule is that if a fund's portfolio is more than 50% foreign, then the fund is allowed to pass the foreign taxes through to you. FLPSX, at 1/3 foreign, can't do that. (Funds are not required to pass through the taxes, but they usually do.)
Just an offbeat thought on a replacement or complement to FLPSX. I'd say it was thinking outside the box, but part of the appeal is that it falls within the same style box.
Sorry, some how that "logic" blows my mind," I'll take less money if I don't have to pay taxes", I wish employees thought that way..... I would have more money
As I said before in my posts - which you conveniently excluded - I have a large portfolio so I'm not swinging for the fences with returns. I can settle for average returns without paying more in taxes. The index funds that I cited have done very well in the past and I would have saved some money in taxes. Tax-adjusted returns do mean something, despite what you may think.
Thanks for the constructive input, BTW.