Mike Wallberg, CFA
Vice President, Marketing & Communications
The estimated 2017 capital gains distributions for funds are in and we see good news this year for our clients: some funds are not expected to distribute any capital gains at all, and others are in the low percentage points. An important caveat is that these low distribution levels cannot always occur because, after all, actively managing a portfolio that is increasing in value (a good thing!) will of course trigger gains from time to time. As our clients prepare for the holiday season and their thoughts turn, of course, to tax planning we thought it was a good time to provide a refresher on how capital gains distributions work, and talk a bit about how our clients benefit from our long-view approach.
Anatomy of a distribution
Funds have two sources of return that the CRA taxes: income and realized capital gains. Income represents the dividends paid out by stocks held in a fund, plus any interest received from bonds or other short-term securities.
Realized capital gains represent the gain locked in when we sell a security for more than we paid for it (or loss if we exit below our original cost). These gains and losses from the year are netted out against one another and the net gain is then “distributed” to clients, which is taxable. Income distributions tend to be issued monthly or quarterly and capital gains distributions annually, at this time of year.
Forecasting and managing capital gains distributions
The bad news about capital gains distributions is that it is very difficult to predict them. There is not necessarily a relationship between fund performance and distributions in any given year, but over time investors should expect to receive them as a marker that progress has been made in growing their investments. Gains are realized when we trim or sell positions when they become overvalued or our outlook changes.
One of the benefits of investing with us is that our long-view investment style naturally gives rise to lower distributions in any given year – because we tend to buy and hold for longer periods and therefore don’t trade as often, we tend to trigger relatively fewer gains from year to year.
While it is somewhat of a simplification, this benefit can be seen in the following charts where we plot the total fund return in each year for our core funds, against the capital gains issued for that year.* While income earned within the funds of course also contributes to total returns, our buy-and-hold approach helps our taxable clients defer the tax bill that comes with realizing capital gains, many years into the future.
Holders of our US Equity Fund will note that the anomalous capital gains distribution from 2016 (when the fund had higher turnover due to a change in sub-advisor) was not repeated this year. At an estimated 3 percent of unit price for 2017, distributions are more in line with the actual experienced gains (through November). Put in the longer historical context, the fund itself has, in fact, distributed very little of its actual gains over the past five years. This can be said of virtually all of the funds shown.
A few housekeeping items
A quick reminder that Leith Wheeler has moved the tax year end for several of our funds to December 15th from our historical date of December 31st, and so our distributions will occur on December 21st. We did this to be consistent with general industry practice.
You may notice that when a distribution happens in a fund, the fund’s unit price dips. This dip is the exact amount of the distribution – because that gain has now effectively been taxed in the hands of unitholders, the price for new buyers of the fund lowers. For this reason, you will see the unit prices for all of our funds with distributions fall slightly on the 21st. Don’t be alarmed; you receive a commensurate number of units via the distribution, so your overall market value is unaffected!
As noted, the final distribution figures are difficult to forecast, but we have provided below some estimates for the unit distributions you might expect to receive on December 21st in each of the five core funds discussed above. We distribute capital gains annually for each of the funds, and distribute income quarterly for all but the International Pooled Fund.
Finally, as the holiday season arrives, we at Leith Wheeler find ourselves reflecting on how thankful we are to have the opportunity to work with you, our clients. So we want to take a moment to thank you for your business, and pledge to work diligently and loyally to better your interests again in 2018. Your trust in us is the reason we get to do this every day, and we are grateful.
Happy holidays, and all the best in the new year!
* All Fund Performances and Distributions shown are for “Series A” of each Fund (which do not have embedded fees) with the exception of the Balanced Fund, which is shown net of fees. 2017e distributions and fund performance estimates are as of November 30, 2017.