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Capital Gains Propel Tax-Managed Funds


In response to incurring mounting capital gains taxes, investors have moved assets into tax-managed funds, fund analysts say. As a result, a number of companies have introduced new tax-managed funds. Prior to this year, many funds performed well as stock prices soared. However, as those prices begin to fall, as they did this year, especially in the tech stock area, capital gains have been realized from sales of stock to meet redemptions and investors have been hit with increased taxes.

The Fidelity Tax Managed Stock Fund has seen assets rise from $68.8 million at the end of November, 1999 to $99 million at the end of November, 2000, a growth of nearly 50 percent, according to MAXfunds, a fund tracking firm in Ann Arbor, Mich. In the same period, the assets of the J.P. Morgan Tax-Aware U.S. Equity Fund grew more than 37 percent, and the assets of the T. Rowe Price Tax-Efficient Growth Fund have grown over 28 percent, according to MAXfunds.

"More and more people are beginning to focus on taxes in their taxable portfolios," said Kunal Kapoor, senior fund analyst at Morningstar of Chicago. "I think part of the reason for that is that when you look at some of the large popular funds, they've paid out some big distributions even when they've had a bad year. In 1999, value funds realized a lot of capital gains when they had outflows and were forced to sell holdings and in 2000, growth funds were down, and then sold their previous winners."

It does not take long for investors to become more sensitive and respond to something like that, according to analysts.

"The nature of the equity markets over the last few years have generated capital gains for investors at higher levels than in the past," said Edward Rosenbaum, director of research at Lipper of Summit, N.J. "After that happens a couple of years, consciousnesses are raised, especially in the rotational market we've experienced. It's quite an experience for an investor to have a fund that has only a slight return yet has high capital gains taxes."

In addition to being relatively tax-efficient, tax-managed funds, of which there are 70, have performed well recently, according to MAXfunds. That is another reason investors would turn to them, according to Kapoor.

"The fact that these tax-managed funds have done well has made investors more cognizant of taxes in their taxable portfolio," he said. "Many are growth oriented so that might skew the data slightly, but in general, if you look at these products, they've done quite well."

Three new tax-managed funds were launched late last month. The J.P. Morgan Tax Aware Small Company Opportunities Fund (MFMN 12/18/00) and First Quadrant Tax-Managed Equity Fund of Managers Funds of Norwalk, Conn., were introduced on Dec. 20. T. Rowe Price introduced its Tax-Efficient Multi-Cap Growth Fund Dec. 29.

J.P. Morgan introduced its new fund because its other tax-managed funds have had net inflows and there has been an increased investor demand for that type of product, according to George Gatch, managing director and head of J.P. Morgan's mutual fund business. The same is true of the new Managers tax-managed product.

"We've seen a lot of interest and a lot of investors who want to get involved with this type of product," said Peter Lebovitz, president and CEO of Managers. "There's no question that demand has increased due to the recent market."

Fund companies are constantly coming out with new products and it is not at all surprising that they would try to benefit from investors' heightened sensitivity towards taxes, said Ryan Tagal, an analyst with Cerulli Associates of Boston.

"A lot of fund companies are looking to get a new niche in with their consumers," he said. "Prior to 2000, everyone just saw their returns go up 25 percent and everyone was happy. Then you had slow and negative returns and people worry more about taxes. Firms have tried to offer more products that adhere to the concerns of investors."