No matter the reason, they all result in what’s referred to as portfolio turnover. Managers may shift their investment thesis to take advantage of new opportunities, causing them to sell positions they may have held for a long time. A significant downturn in the markets may require the fund to raise cash to meet redemption requests, resulting in the selling of stocks at a gain, depending on how long they’ve been held. There are many reasons why a fund, or a group of funds, may distribute capital gains in any given year. Even when markets are down, the sale of a security can still generate a gain, for example, if the security had been held in the fund for many years and had appreciated. Instead, they are determined by the sale of securities within a fund. Remember, capital gains aren’t always a product of strong market or fund level performance. Why is good portfolio turnover important? equity mutual funds in 2021 was 12% of net asset value (NAV), the highest level in 20 years.Īnd for investors in non-qualified accounts, that likely led to a big tax bill in April. The average capital gains distribution for U.S. But with all good news, there is always a little not-so-good news: it was also a banner year for capital gains distributions. The S&P 500 Index returned 26% in 2021, its third straight year of double-digit returns. We mention this because you may have had some difficult conversations with clients about their Form 1099-DIV this year, which possibly felt a bit like the conversation you had with your doctor if your cholesterol numbers were poor. But just like cholesterol, there is good and bad portfolio turnover! Conventional wisdom has relied on portfolio turnover as a starting point for screening investments, especially for non-qualified accounts. Quarterly portfolio reviews are a little like a regular doctor’s visit for your clients’ investments. If your cholesterol numbers were bad, what did your doctor tell you about how to reduce your bad cholesterol and improve the good? Perhaps some changes to your diet or exercise program? While bad cholesterol is what everyone focuses on, it’s important to realize that your body does make good cholesterol that helps to lower the risk of heart disease. ![]() ![]() If you are of a certain age, after your regular checkup, your doctor gives you the results of your body’s good and bad cholesterol. Think back to your last doctor’s visit … were you screened for your cholesterol levels?
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