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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121340  
Subject: Re: Gains but my fund value has dropped!!! Date: 3/22/2001 12:08 PM
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"OK. I'm posting for my mother here since she's not yet internet enabled.
She's owned shares in Westcore MIDCO fund for 10+ years (started with $5,000) and has had to pay on short and long term capital gains on the distribution for each of those years. Now one thing that I've noticed since taking over dealing with the tax returns (Dad died in mid 99) is that for both 1999 and 2000 her net value in the MIDCO fund has dropped $2,000+ per YEAR ($16,500 to $14,400 then $14,400 to $12,270) while she's had to pay taxes on $4,600 (long term 1999) and $7,200 ($2,400 short term and $4,800 long term 2000) capital gains distribution during these last two years. (In fact, her share value dropped in 2000 from $20.06 to $6.41 per share!!!) So, why can't we also show the damned loss in real value of her investments over the last two years? (According to our tax preparer, if it doesn't show a loss on the 1099-div the actual devaluation can't be claimed.)
This has hit our family quite hard on taxes due for both state and federal returns for the last two years and I'm trying to understand if she should continue to hold Westcore MIDCO or should she re-invest in something else."

Derek,

Unfortunately, your mother is in the same bad situation as many mutual fund owners in the bear market of having to pay taxes on distributions, while the net asset value of the fund has dropped substantially. (Personally, I would like to see Congress enact legislation to exempt long term gains in mutual funds from annual tax payments, while maintaining annual payments for short term gains, to encourage funds to invest long term and punish the traders.)

As to whether she should switch funds, two things to consider. First, if she sells now, even though the fund has done badly over the last couple of years, she would have to pay long term capital gains taxes on the gains since her initial investment.

Second, you need to look at the fund to see if it is inherently a high tax fund, or if the last couple of years are an aberration. For tax purposes, it is preferable to have money in a low tax fund, one with minimal stock turnover and dividends. You should see if you can find earlier records to tell whether these high capital gains distributions are typical. Based on the information you've given, it looks to me like the fund manager sold a lot of long term investments, since most of the gains are long term not short term. This is a different strategy than the most tax conservative one of just waiting out the bear market, but it is not the same as that of the high turover, trading mutual funds, which generate huge short term capital gains taxes every year, and will continue to do so. You might see how the prospectus desribes the investment approach or call (what you really want to know is the portfolio turnover rate, looking back over the last 10 years).

If the fund's basic approach is to invest in stocks long term, and is not a high turnover, trading fund, and it intends to return to the long term investment approach once we get past the bear market (knock on wood), switching around to find a more tax efficient fund may not be worth it, because the Wescore fund should generate less taxes in the future. If it is an active trading fund, high taxes will continue, and you should seek tax efficient ways out. One suggestion that we've discussed here is to stop automatic reinvestment of gains, that is to take the gains and invest them in a more tax efficient fund. If she has various investments, she should also consider selling those that generate the most taxes first, when she needs the cash (I hope after the bear market is over). At this point, if she sold, she would have to pay long term capital gains taxes on about $7000. If the fund is generating thousands of dollars in taxable distributions on a value of less than $20000 every year, it may be worth selling now, paying taxes on the $7000 gain and finding a tax efficient fund which would generate only 1-2% annual taxes.
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