The report, which focused on the importance of understanding by investors a fund’s income distributions, found that abnormally high fees might eat into income distributions.
“Funds most susceptible to this factor are those that earn a high-performance fee without commensurate net realised capital gains,” the report said.
Also, according to the study, the very large income distributions often occurred when managers decided to distribute outsize realised capital gains.
At the same time, it showed that the relationship between portfolio turnover and a fund’s tax effectiveness wasn’t clear-cut.
Morningstar said that some level of turnover could be beneficial to when it came to managing a fund’s tax-cost base and could limit the potential for “a chunky portion of taxable realised capital gains in distributions” but this would require “sensible tax-lot management” to offset capital gains and losses.
Also, investors could benefit from disclosure of a fund’s unrealised capital gain or loss status, the study showed.
“On balance, the era of accumulated tax-loss carryforwards appears to be ending this cycle, but the date is always relevant,” it said.
The final finding was that the new Attribution Managed Investment Trust (AMIT) tax regime may help limit the impact of ongoing unitholders being faced with a lumpy income distribution.
