Conference nyoss1::market_investing

Dave,

Just curious.  Since you subscribe to 5-Star Investor, what do you think of the
publication?

Michael

    Sorry, I can't really give an opinion since I was briefly borrowing a
    friend's copy. My friend, a broker, feels it's invaluable.
    
    -Dave 

    
    
    
    
    >    The latest copy of Morningstar includes an interesting statistic
    >    for mutual funds: percentage of unrealized capital gains. I guess
    >    during the 80's and early 90's funds have been building up what
    >    can be significant unrealized capital gains, which new investors
    
    
    Does this happen because a Fund buys a stock and holds it for several
    years? Are the investors with shares in the Fund at the time 
    that the Fund sells those stocks the ones who are responsible for 
    reporting the gain? Maybe someone can explain mutual fund capital
    gains distributions with a concrete example? For instance,
    suppose I buy something like 20th Century Ultra (with their 30%
    unrealized gains) on December 29. They realize those unrealized
    gains on December 30 and "distribute" them to shareholders on 
    Dec 31st. How would this capital gain distribution be reported to 
    me and to the IRS? Let's say that the NAV did not change, and that 
    the fund distributed no other income in those three days. Would
    I pay capital gains taxes on 30% of the amount that I invested on
    Dec 29?
    
    
    Also, does anyone know what you get for Morningstar's $55 trial
    subscription? Do you get the entire 8-10 volume listing of funds 
    &monthly updates, or do you just get the monthly updates?
    
    
    doug
    
    

>    Also, does anyone know what you get for Morningstar's $55 trial
>    subscription? Do you get the entire 8-10 volume listing of funds 
>    &monthly updates, or do you just get the monthly updates?

you get the entire set, and then updates every two weeks for one of each of
the ten sections.  The 5-Star investor I was speaking of is published by
Morningstar, but is a seperate subscription.

Michael

    re: .3
    
    You are right! If you bought into the fund on Dec. 29 and the fund
    declears a capital gain of 30% the next day, you are responsible for
    tax on that whole 30%. On the other hand, if you sold out on Dec. 29, 
    then, you are only liable for that your real gain is. Not fair, hah? 
    But, that's the way life is. I learned this in the hard way. :-)
    
    Mike

    I believe the general recommendation is to buy after the fund
    distributes its capital gains at the end of the year. A good time to
    buy, from this perspective, is the day after the gains are distributed,
    typically in December or January.
    
    In reality, if you are dollar cost averaging over a period of many years,
    I doubt whether this initial timing will make a big difference.
    
    ... Kris Chandrasekhar

Hi,

I'm confused.  Is this a paper gain?  Wouldn't the owner of shares get a 
check in the mail?  

I must have misunderstood, but wouldn't the person who purchased in 
December realize a tidy gain by selling immediately in January?  Sure, 
tax would be involved but 30% would be a nice payoff?

Please straighten me out on this.

Thanks,

Peter

re: .7

You do not gain anything with that 30% distribution. What the company will do 
is to reduce the share price by 30% and count that as your capital 
gain/dividend - so, you have to may tax on it. You will get a check in the 
mail if you don't have your distributions automatically reinvested. 

re: .6

I don't think either way really matters that much. If you did buy into a fund 
right before its distribution, you'll have to pay tax on that distribution. 
But, then again, your share price is also lowered. So, let's say that when you 
sell the fund, the share price did not change (from the reduced price after 
distribution). Then, you would have a capital loss. You can write this off 
from your income. So at the end, it's a wash. But, one has to be careful here 
that not to make these transactions within 30 days of each other. Otherwise, 
you'll get hit with the wash-sale rule.

Mike

re                       <<< Note 576.5 by SOLVIT::CHEN >>>

>    You are right! If you bought into the fund on Dec. 29 and the fund
>    declears a capital gain of 30% the next day, you are responsible for
>    tax on that whole 30%. On the other hand, if you sold out on Dec. 29, 
 

I think a typical mutual fund prospectus calls this "buying a dividend"

    You need to look at the individual funds or fund families.  20th
    Century does their distributions at the end of December.  Investco
    (formerly Financial Funds) has been distributing gains in October.  I
    believe this is driven by the fiscal year of the family.  And it is to
    be avoided for major purchases.
    
    Regards,
    
    Jeff

    re: .8
    
    Yes, the 'gain' and 'loss' are opposite and equal, so in a sense it is
    a wash.  But the tax you pay today is money that can't earn money the
    next year.  In general 'tis better to delay paying taxes:
    
    $10000 to invest, $10/share price, about to pay $3/share dividend:
    
    	$10000 = 1000 shares.  Dividend = $3000, share price now $7/share,
            Pay taxes on $3000 dividend = ~$900
        A year later, still at $7/share, sell all shares.  Capital loss
        of $3000, save on taxes = ~$900
    
        The net affect is that you have loaned $900 to the government,
        interest free...
    

    re: .11
    
    Agreed!
    
    What I was trying to say is that if you did make a mistake like I did.
    Don't kick yourself too hard for it. It's not a total loss. Besides, if
    one uses DCA and if the fund only declears <2% capital gain/dividend,
    then the tax impact is really limited. It should be much less than
    $900. Now, if we are talking about people who work for DEC, that number
    is going to be VERY SMALL.   :-)
    
    I have a question. What is the likeliness that Ultra Fund will declear
    that 30% unrealized capital gains all at once? 
    
    Mike

re. 12

The chances of Ultra dumping all 30% is very small.  The management has stayed
the same (or close enough...the son took over for his father).  But in cases
like Fidelity Magellan where Jeff Vinik sold all his consumer stocks and 
Selected American Shares where Shelby Davis took over for Donald Yacktman
the changes are VERY high.  In the case of Selected American Shares almost
a 100% turnover from consumer-goods stocks to financials.

/mtb

Re .10

>    You need to look at the individual funds or fund families.  20th
>    Century does their distributions at the end of December.  Investco
>    (formerly Financial Funds) has been distributing gains in October.  I
>    believe this is driven by the fiscal year of the family.  And it is to
>    be avoided for major purchases.

Since Congress passed a law a few years back that 90+ percent (I forget
the exact number, but it's in the high nineties) of all dividends and
capital gains (the latter presumably offset by losses) must be distributed
in the year that they are realized.  So no matter what the fiscal year of
the fund, if there are unpaid capital gains and/or dividends at the end of
the calendar year, there will be a distribution in December.  And probably
not too early in December, since if the fund distributes on the 15th and
realizes sufficient gains in the last half of the month, they'll have to
do a second distribution to cover those gains, and they don't want to have
to do that.

-- Andrew

As a point of clarity, 20th Century Ultra has not always declared a 
distribution in every year; 1992 was no distribution, just "paper gains"
(unless, of course, you sold out).

Dave