Mutual Fund Hits Investors With Huge Tax Bill

Mutual Fund Hits Investors With Huge Tax Bill

A change in the manager and a fund’s strategy may create a huge distribution to holders of the FPA Perennial Fund managed by FPA advisors, according to a story in the Wall Street Journal today.  Because the fund has changed managers and its strategy, many of the underlying holdings were liquidated to transform the fund to its new holdings.  When mutual funds sell shares of underlying securities, the short and long-term gains on those holdings are required to be distributed to the shareholders in those funds, an occurrence that is considered a taxable event to all existing shareholders of the fund that hold it in taxable accounts.   The Fund manager estimates that the distribution for the FPA Perennial Fund would equal approximately 80% of the Fund’s net asset value based on recent prices.

Taxable distributions are one difference between mutual funds and ETFs.  ETFs are generally able to exchange its holdings in-kind, thus avoiding significant distribution events that create taxable events for their shareholders.