Fund Industry Should Be More Fair and Open

In Russ Wiles’ “Before Investing, Check Tax Status of Payout” (March 19), he correctly states that “mutual funds don’t do a good job of minimizing capital gains payouts to investors.” I did find it odd that Twentieth Century’s Growth and Select funds were cited as efficiency standouts. According to Morningstar, over the last two years ended December, 1994, these funds distributed cumulative capital gains distributions of $5.99 and $7.34 per share respectively. That’s efficiency?

Additional points should be made here. Because the vast majority of fund investors reinvest their distributions rather than receive them in cash, the fund companies’ asset base (and hence their fees) are unaffected by the payouts. Therefore, funds don’t have a profit motive for reducing distributions. In my discussions with fund houses concerning this issue, most dismiss the notion that minimizing the shareholders’ tax burden should even enter into the investment management process.

The fund industry’s lack of concern is evidenced by the timing of the payouts. Most funds declare distributions at the tail end of the tax year, ensuring that shareholders can do nothing to prepare for the added tax burden. In the vast majority of cases, no notice or estimate is given in advance. IRS penalties for being under-withheld can and do result. The obvious message: You’re on your own.

Unfortunately, because most fund managers are traders rather than investors--evidenced by average portfolio turnover rates of 100% per year--capital gains distributions will continue to be a problem. But if the fund industry would only adopt a policy of fairness and open shareholder communication, much of the pain could be reduced.

For my money, I’m moving into stocks and index funds for my non-retirement accounts.

LAWRENCE KROLL

Rancho Cucamonga