Wednesday, October 17, 2007

Funds' tax planning time

We are now in tax planning, and acting, season for fund managers. For those of us not running a mutual fund or hedge fund with hundreds of millions or billions of dollars, it's time to pay attention to those who do. The funds are not just involved in "window dressing" or "manipulating" period end results. They are taking actions to minimize the impact of taxes on their clients.

It's been an ok year thus far in the equity markets, but no one would say that it hasn't been volatile. There have been big winners and losers, in both sectors and individual stocks. So hypothetically, here's a situation. A hedge fund manager with a concentrated stock portfolio has huge losses in a few stocks related to the housing market that are still troubled. He also has huge gains on some stocks, say, in the mid cap industrial equipment area, stocks that still look strong with decent growth prospects and a sound balance sheet. He wants to clean up some of the exposure to the stocks with losses and perhaps has been doing so already. Preferring to use those losses to generate some value he sells a portion of his stocks with large gains, not because in and of themselves they should be sold but because that serves a larger purpose to his portfolio. They can be bought again anyway.

For us small fries in a year like this, that can put seemingly unexplained pressure on stocks that have everything going for them. It can limit any further upside in the next two months. Since, however, we can trade shares without even our spouses knowing about it much less the market it is a perfect time to take some capital gains, especially long term, by paring back and benefitting from some of our better performers for the year. We can avoid the tax season pressure and anytime after 30 days can choose to reload if we choose. Of course we too can actually also be doing what the pros do as far as balancing losses with gains, especially, especially, if the gains are subject to short term cap gains rates.

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