Mutual Fund Distributions 101


mutual fund

By now you should have received your Tax Form 1099-DIV for 2015, and you may have noticed that our equity funds paid larger-than-average taxable distributions in 2015. In light of the relatively large distributions in a down year, now may be a good time to review why and how mutual funds pay distributions.

Why do funds pay distributions?

Tax law requires that mutual funds pay out substantially all net investment income and net capital gains to their investors each year. Long-term capital gain distributions (gains realized from securities held Read morefor more than a year) are taxed at long-term capital gains tax rates. Distributions from short-term capital gains (gains realized from selling securities that have been held less than a year) and net investment income (interest and dividends) are taxed at ordinary income tax rates, which are generally higher than long-term capital gains tax rates.

Why does a distribution cause the fund’s price to go down?

A mutual fund’s net asset value (NAV) is composed of capital paid in by purchasing shareholders and accumulation of income and gains that have not yet been distributed to shareholders. When a fund makes a distribution of accumulated income and gains, the fund’s NAV decreases by the amount of the distribution per share. For example, assume that a mutual fund that has an NAV of $20 today (the record day), declares a distribution of $2 with an “ex-date” and “pay date” of tomorrow. Now suppose that you held 1,500 shares of the fund on the record date, with a market value of $30,000. You would receive $3,000 ($2 per share x 1,500 shares) in distributions on the pay date. Your 1,500 shares would now be worth $27,000. If you reinvested your distribution, your $3,000.00 would purchase an additional 166.667 ($3,000/$18 per share) shares on the pay date. Your new share balance would be 1,666.667, still with a market value of $30,000. It is important to note that market activity also impacts the fund’s NAV on the ex-dividend date, so the total change in a fund’s NAV may be more or less than the total distribution amount.

Are distributions taxable?

Shareholders are responsible for paying taxes on distributions they receive each year, whether they receive the distributions in cash or reinvest them in additional shares of the fund. Certain types of fund accounts, such as IRAs, are tax-sheltered; therefore, shareholders who own these types of accounts will not pay taxes on fund distributions. The funds report distributions to shareholders on IRS Form 1099-DIV after the end of each calendar year.

Why did the funds pay distributions in 2015 when the returns were negative?

It may feel like adding insult to injury to have a capital gains tax bill in a year when the funds are down. For mutual funds, the total return for a given year often has little to do with the size of the distributions for that year. It is possible for a fund to produce negative returns but pay a sizable distribution (or vice versa). A number of factors contributed to the size of the distributions in 2015:

1.    In the seventh year of a bull market, after having pushed gains forward fairly successfully, we ran out of offsetting losses to ‘harvest’;

2.    In a market where stock prices seem inflated (due in part to Fed quantitative easing), many of our stocks’ prices seemed ahead of themselves. We believed the risk of giving back some gains was greater than the cost of paying taxes sooner than later. (The penalty of realizing the gains now is really losing the use of the tax payments for a tax year or two—the tax, eventually, would have come due);

3.    A few stocks—notably Valeant—gave us company-specific reasons to sell out completely earlier than we had hoped.

Ironically, the other side of the ‘over-valued-market-that-kept-going-up’ coin was that our stock sales left us under-invested in a year when a handful of stocks was responsible for much of the overall stock market gains. The result was soggy relative returns, but we consider that a consequence of sticking to our process. Being out of step with the market is a natural part of value investing but is annoying when we’re out of step in a negative way.

Finally, when do the Weitz Funds pay distributions?

Value, Partners Value, Partners III Opportunity, Research, Hickory and Balanced Funds typically pay distributions in June and December. Short-Intermediate Income, Core Plus Income and Nebraska Tax-Free Income Funds usually pay distributions in March, June, September and December.

Additional information about distributions, is available on our website.

All investments are subject to risk, including the possible loss of the money you invest.Past performance does not guarantee future results. There is no guarantee that any particular asset allocation, or mix of funds, or any particular mutual fund, will meet your investment objectives or provide you with a given level of income.