Dear Clients and Friends of Accretive,
As we approach year-end there are a few items that we think bear special attention: capital gains distributions and tax loss-harvesting.
First, let’s address capital gain distributions. Mutual funds are required to pay out capital gains to shareholders to the extent they are realized within the fund throughout the year. Estimates trickle out from fund companies throughout the fall and payouts typically occur in December. Exchange-traded funds have this same requirement but very few, if any, realized capital gains build within the fund because of an in-kind exchange mechanism.
At Accretive, for taxable accounts, we typically invest in a combination of low turnover, long term mutual funds, ETFs, and individual equities. For our model portfolios, the majority of funds have no gains to distribute this year and the ones that do are in amounts that we would consider to be insignificant. In Accretive’s model equity portfolios, we are long term investors that are as likely (perhaps more likely) to sell losers as we are to sell winners. This is because we agree with what great investor Peter Lynch said three decades ago in his book One Up on Wall Street: “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.” As a result, capital gains generated in these portfolios have tended to be on the low side as a percentage of the amount invested.
Some further context may be helpful here; a number of the largest and most popular actively managed mutual funds are distributing 5-10% of the mutual fund’s Net Asset Value to shareholders as a capital gain. But because of the investment management style we described above, for our model portfolios, we anticipate the capital gains distributed to be a small fraction of that percentage.
We should note that we are talking about our model portfolios, where we have specifically selected and purchased the securities. A number of clients have taxable portfolios with legacy positions brought over to Accretive and a plan to transition a portfolio with embedded capital gains to our portfolios over some period of time. Those legacy positions may distribute more or less than securities in our model portfolios. These distributions are also exclusive of realized gains from portfolio activity. Examples of excluded portfolio activity are: rebalancing, changes to a specific investment objective, and changes we make to the portfolios throughout the year. 2019 has been a year of significant gains in the market, no matter which market we look at as US investors. We are happy with the way our portfolios have participated and are even happier that our model portfolios are not creating large obligations for our taxpaying account holders.
This brings us to our other topic, tax-loss harvesting. We will be looking to sell positions that have experienced a loss, replacing them with a position that we expect to perform similarly, and holding that position for at least 31 days. Booking losses, to the extent there are some in a taxable account, should allow us to offset some portion of gains distributed or generated throughout the year. We look for opportunities to do this throughout the year, but as we get to year-end there is more certainty around the capital gains we are trying to offset. The bottom line is that if you have a taxable account, then you may see a somewhat elevated level of activity in that account this month and in January.
We appreciate the trust and confidence you have placed in each of us and our company. It is not something we take for granted; we strive to earn it every day. As always, if you have any questions please feel free to reach out to us.
Gary Ribe, CFA, CFP®
Chief Investment Officer
Accretive Wealth Partners, LLC (“Accretive Wealth”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Accretive Wealth and its representatives are properly licensed or exempt from licensure.
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