The SUBText: Sept. 9, 2016

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Today, we’ll shift gears and move back to ground level. Preseason football has started, which means it’s mutual fund distribution season!

Why does this matter? As we have a blend of passive and active funds in our portfolios, we get capital-gains calls every year. These come in when clients glance at the mutual funds on their statements, and ask, “XXX fund dropped 8% this month! Why on earth are you keeping it?”

Remember that when we buy a mutual fund of any stripe, we’re buying an existing basket of stocks/bonds/whatever, most of which were owned long before we came along. Sometimes, over the course of the year, those underlying bits get sold by the manager, and WE own any gains on those positions, even if we didn’t own the fund at the time they were purchased. These gains are built up on the books over the year, and recorded all at once near the end.

Here’s the accounting lesson: since the gains were carried on the books all year, they were reflected in the share price of the fund all along. Once they’re paid out, they’re not on the books any more. So, if we had a $100/share fund that kicks out a $10 capital gain, we now have a $90/share fund, plus $10 in hand. Most of our clients reinvest their distributions- they simply buy more shares of the same fund automatically, so this transaction flies under the radar often.

Is that too much ‘inside baseball’? Maybe. But we get those calls every year, so we’re getting out ahead of them this time.

Of course, we’re here all day for your questions.




Dennis Crowley, MBA

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