Capital Gains Tax Could Put a Dent in Your Vanguard Returns

by Dan Wiener | November 12, 2013 12:36 pm

Mutual fund investors have been living, for a bit anyway, on borrowed time. Losses suffered during the financial crisis were the perfect antidote for capital gains earned during the recovery. That golden period is ending and Vanguard’s recent estimates on capital gains for some of its funds show where the tax hits are going to fall.

Small cap stocks, funds with higher-than-average turnover, and long-term strategies that turn over winners after years and years of gains are all projected to hand their shareholders some decent gains this year.

Topping the list is Vanguard Explorer Fund (VEXPX[1]), a small-cap growth fund run by no fewer than 11 portfolio managers at  six firms. It is poised to pay out 10.1% of its current net asset value in capital gains this year. That’s big. Vanguard Capital Value Fund (VCVLX[2]), run by two managers from Wellington Management with distinctly different styles and a fairly rapid turnover rate (compared to most Vanguard funds) is estimated to be paying out 9.9% of its net asset value this year. And Vanguard Explorer Value Fund (VEFVX[3]), another small-cap fund with seven managers at three different firms, will be paying about 6.5% of its value out in gains.

Plus, some bond funds will be paying out capital gains despite also showing losses for the year — something some equity fund investors experienced during the market decline when fund managers were losing money, but taking profits on long-held positions.

In these multi-managed funds, is one manager responsible for taking all those gains? Would the gains be smaller if one manager cross-traded with another rather than running independent sleeves in the portfolio? For that matter, would one single manager, rather than handfuls, run more efficient funds with smaller distributions? Unfortunately, there’s no way to know and Vanguard’s not about to tell you, or me. For all the supposed transparency in the mutual fund industry, there’s very little shared when it comes to the actual way that funds are managed for their shareholders.

Vanguard capital gains[4]

Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors[5], a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.

  1. VEXPX:
  2. VCVLX:
  3. VEFVX:
  4. [Image]:
  5. The Independent Adviser for Vanguard Investors:

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