Can a fund w/ a negative NAV growth have a big distribution for the year?

[jayk2k3]

I was listening to the Ric Edelman show this weekend and he pointed out FPPFX has an 82% distribution payout yet its NAV was down for the year, on the order of about - 8%. How can a fund distribute a taxable distribution even if its NAV had not accrued a positive gain? This must be an extreme example of the potential to buy a distribution. I could see if someone bought a fund in early December and got walloped maybe with a 10% distribution, but holy smokes, an 82% distribution?

[disneysteve]

Yes, a fund can certainly have a capital gains distribution even if the NAV didn't increase. Those two issues aren't really related. Throughout the year, the fund buys and sells holdings. When they sell at a profit and realize a capital gain, that needs to be distributed to fund holders.

I'd be pretty upset with an 82% distribution unless the fund was in one of my tax-free accounts. Last year we got hit with a large distribution (not that large) from one of our taxable accounts so I know how that goes.

[jayk2k3]

So let say you invested 100,000 beginning of the year, would you have made a profit because of the high capital gains even if the fund is down?

[disneysteve]

So let say you invested 100,000 beginning of the year, would you have made a profit because of the high capital gains even if the fund is down?

Maybe. If you look at most funds and compare changes in NAV to total return of the fund, there isn't much correlation. This came up in another thread where someone said that a fund didn't do well but they were looking only at the NAV growth over time, which was something like 2 or 3%. In reality, the fund had an average annual return of more than 15%. Most of the growth isn't reflected in the NAV.

[feh]

So let say you invested 100,000 beginning of the year, would you have made a profit because of the high capital gains even if the fund is down?

Total return is what matters, not the NAV.

[disneysteve]

Total return is what matters, not the NAV.

Exactly. NAV really isn't a measure of anything except how much it costs to buy a share of the fund.

[kv968]

So let say you invested 100,000 beginning of the year, would you have made a profit because of the high capital gains even if the fund is down?

In this case you wouldn't have made a profit due to the high capital gains distribution but would, in totality, lost more money than what the fund itself did on account of the taxes due on the distribution (unless held in a tax-exempt account).

The fund in question was trading at $48.48, made a $39.67 capital gains distribution and was trading at $8.82 the next day ($48.48-$39.67=$8.81...close enough for gov't work). So in essence the distribution acts like a dividend payment on an individual stock. Whatever the payout is, the price will fall accordingly (in most cases) however taxes will be due on the distribution.

The reason this fund had such a huge capital gains distribution is because they had a managerial change and the new guy basically sold a lot of long time holdings the previous manager had in order to align the fund to what he wanted. Those holdings had grown over the years so the fund had to incur the capital gains when they were sold.

This is just an unexpected, and usually unwanted, problem with mutual funds (in taxable accounts) although it's usually not this extreme. However it can be quite common for a fund's NAV to go down and have a higher than average capital gains distribution. This happens because say the fund isn't doing well. So what usually happens? People sell their shares. Well once the manager goes through the fund's idle cash the only way he/she can cash out those selling investors is to sell shares which the fund holds (whether he/she wants to or not) and more than likely those shares have been held awhile and have a capital gain attached to them. Therefore the capital gain will be distributed to everyone who holds the fund. Almost like kicking you when you're down if you hold the fund...Not only did the fund itself probably do poorly that year but you have a tax bill to boot. You technically didn't lose any more money than the fund itself did but you get the added "bonus" of paying taxes. Of course this is if it's held in a taxable account.