Mutual Fund Payout Schedules May Surprise

Year-end capital gains payments by mutual funds may come a lot sooner this year, moving aside an obstacle that stops many investors from buying in the fourth quarter.

Meanwhile, some hot funds--particularly in Asian stocks--may not be making any gains payments this year. That means investors who want to buy those funds may not have to wait.

A number of the nation’s biggest mutual fund firms, including Janus, Alliance Capital and Invesco, say they will speed up annual gains distributions this year in part out of concerns investors may have about the year 2000 computer bug.

Earlier this year, the Securities Industry Assn. and Investment Company Institute trade groups suggested that fund companies consider moving up capital gains distributions to ease Y2K concerns.

Traditionally, many funds distribute year-end gains in the last week of December. But because investors may feel uncomfortable making transactions close to Dec. 31, some funds are moving up their distribution dates by a week or two.

Others, like John Hancock Funds, are pushing them up to November.

As taxes have become a bigger issue in recent years, a growing number of investors have put off making new investments into stock funds in the final months of the year for fear of stepping into an immediate capital gains bill.

Mutual funds are required to distribute to shareholders any gains they’ve realized during the year. Unless a fund is owned in a tax-deferred account such as a 401(k), capital gains are taxable to fund shareholders when paid--even to new shareholders.

As an example, say an investor puts $10,000 into a fund a week before it’s due to distribute its gains. If the fund has a net asset value per share of $20, that investor would be buying 500 shares.

A week passes and the fund distributes gains of $2 a share to its investors. The distribution would reduce the fund’s net asset value to $18 a share. Assuming the investor above reinvests the gains, he or she would receive $1,000 worth of new shares (500 shares multiplied by the $2 distribution), so the total investment would remain worth $10,000.

But that $1,000 distribution would be taxable for that year.

If the investor instead waited to buy until after the distribution was made, he or she would avoid the immediate tax hit and would instead receive 556 shares of the fund at a net asset value of $18 per share.

Typically, funds with big returns in any year tend to throw off big capital gains as well. But that may not be the case with hot funds in sectors such as emerging markets and natural resources this year.

Because many of those funds had poor returns in 1997 and 1998, they are carrying forward capital losses from previous years that can be used to offset gains, analysts note.

“The emerging-markets funds in general have such large losses built up that they ought to have a free ride for a couple of years” in terms of capital gains, said Russel Kinnel, equity editor for fund tracker Morningstar Inc. in Chicago.

Indeed, many of those funds say they don’t expect to make capital gains distributions for the remainder of the year--or if they do, the payments will be negligible.

Among them: $146-million American Century Global Growth, $96-million Strong Asia Pacific, $58-million American Century Emerging Markets, $31-million RS Global Natural Resources, $10.4-million Sit Developing Markets Growth, and all of Guinness Flight’s Asia and Internet stock funds.

The fact that some top-performing funds won’t be distributing gains this year while others will be making them earlier “might alleviate some investor delays” in buying, said Steve Savage, editor of the No-Load Fund Analyst newsletter in Orinda, Calif.

But analysts and fund companies suggest that investors call to check on gains issues with individual funds, rather than make assumptions.

“These are estimates,” said James Atkinson, head of Guinness’ Pasadena-based U.S. operations. “Things can change at the last minute.” For instance, last-minute selling by shareholders may force some funds to sell stocks to meet those redemptions--potentially realizing additional gains.

Paul J. Lim can be reached at paul.lim@latimes.com.

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Big Winners, No Taxable Gains?

A number of the top-performing emerging-markets funds say they do not anticipate making any capital gains distributions for the remainder of this year. If they do, fund officials say, the distributions should be negligible. The reason: Many of these funds, including those listed below, are carrying forward steep losses sustained in previous years to offset gains.

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YTD 1998 1997 Fund name Total return Total return Total return Strong Asia Pacific 54.4 -3.1 -31.0 American Century Emerging Mkt. 45.4 -18.9 NA Sit Developing Markets Growth 28.8 -24.9 -5.2 Guinness Flight China 27.9 -15.3 -20.3 American Century Global Growth 27.8 NA NA Guinness Flight Asia Small Cap 23.2 -30.8 -30.8 Guinness Flight Asia Blue Chip 21.9 -11.8 -37.7

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NA=Not applicable YTD=Year to date

Source: Morningstar Inc.