Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
Three Tax-Efficient Funds That Shine
05/27/2008 12:00 am EST
Thurman Smith, editor of Equity Fund Outlook, finds three funds that generate big returns but not big tax bills for their investors.
Large-cap blend BBH Core Select N (BBTEX) is a welcome addition to the thin roster of funds managed with tax efficiency in mind. BBH stands for Brown Brothers Harriman, the New York investment bank and money manager for the well-heeled.
The fund is 9.5 years old, but has only shone since its current managers, Richard Whitner and Timothy Hatch, took over in February 2006. Under their tutelage, it returned the annual equivalent of 10.3%, while the Dow Jones Wilshire 5000 with dividends (“the market”) returned 6.7%.
“Select” usually means concentrated, and Core Select holds 30 names, which is comparatively concentrated. Over half of assets are in the top ten holdings. At 7.4% of assets, Berkshire Hathaway is the largest holding. Foreign holdings are 13% of assets. Low turnover of 18% is part of why its tax impact is a scant 0.1. Core Select has not kept up with the market in the recent rebound, but could be considered by conservative investors at any time.
Touchstone Value Opportunities Z (CCEVX) has been around under other names since 1991. Its current team of three managers has been in charge from February 2007; since then, the fund’s 10.2% return well outperformed the market’s 2.7%. The team focuses on firms of any size with what seem to be improving fundamentals. Its heavy utility weighting (8.7%) is two and a half times that of the market. An 18% energy weighting has helped in recent months.
Value Opportunities might be useful to tax-advantaged accounts seeking a lower-risk, large-cap vehicle. CCEVX is the old no-load class of what is now a load fund; fortunately, it is available NTF at Fidelity and Schwab.
The charter for Fidelity Leveraged Company Stock (FLVCX) calls for it to seek firms with debt on the books [since] these are often firms with high growth prospects, and obtaining capital from borrowing will strengthen per-share values rather than dilute them through issuing new shares. This fund was slow out of the gate this year, dropping 8.8% in January and ending the month near the back of the mid-blend category.
January was a tough month for the energy sector, and this fund’s 28% stake weighed heavily on returns. The sector bounced back in February, though, helping the fund dramatically narrow its losses and climb past more than 80% of its category peers. The fund’s sector bets can add to its volatility, and as its name implies, it owns companies with leveraged balance sheets, which often carry added risk. Debt, for example, can have a negative impact on a company’s stock, particularly if the company has trouble making interest payments or refinancing maturing bonds.
Manager Tom Soviero managed Fidelity high-yield bond portfolios for years. Leveraged Company is tax efficient and best used by aggressive investors to liven up their portfolio, but it’s not a core position.
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