Fund's Successful Bet on AIG Triggers a Big Tax Bill for Investors -- Getting Personal
November 23 2015 - 4:36PM
Dow Jones News
By Daisy Maxey
A mutual fund that reaped big gains in American International
Group Inc. has been selling shares of the insurer, producing a
sizable taxable distribution for investors.
The $4.8 billion Fairholme Fund said it expects to pay out
between $11 to $11.75 a share in capital gains on Dec. 11, equal to
32% to 34% of the fund's net asset value as of Friday. In
announcing the expected distribution, Fairholme Capital Management
LLC pointed specifically to its investment in AIG, the insurance
conglomerate that was bailed out by the U.S. government in 2008.
The company is now under pressure from some critics to break up
through spin-offs or sales of some of its operations.
The fund purchased AIG common stock in 2010 and 2011--"at a
fraction of the company's estimated book value at the time,"
Fairholme said--and received a distribution of warrants in 2011. As
the insurer rebounded, AIG stock and warrants grew to be nearly 50%
of Fairholme Fund's portfolio, according to researcher Morningstar
Inc.
AIG had generated more than $2 billion in gains for Fairholme
Fund shareholders through June 20, Fairholme Capital Management
said in a Q&A on its website. "We determined that it was an
opportune time to realize the gain and began to reduce the position
in AIG common stock," it said.
The large-cap value Fairholme Fund has been managed by
deep-value investor Bruce Berkowitz since its launch in 1999.
Fairholme Fund has been extremely concentrated and volatile. It
had just 10 stock holdings and 30 other holdings as of May 31,
according to Morningstar. As of that date, 65% of its assets were
in its top five holdings, and nearly 73.6% of its assets were in
the financial-services sector, with more than 19% each in AIG and
Bank of America Corp., Morningstar said.
It is unusual to have mutual-fund companies discuss specific
holdings that triggered capital-gains distributions in their
disclosures of the payouts to shareholders, said Mark Wilson, chief
investment officer of Tarbox Group, a wealth-management firm in
Newport Beach, Calif., who tracks mutual funds' capital-gains
payouts.
"If you have really big bets like Bruce does, when you take
profits and make money, it's going to be really costly," Mr. Wilson
said.
When mutual funds sell securities in their portfolios, they are
required to distribute the net gains to fund shareholders, who then
may owe taxes on those gains if the shares are held in taxable
accounts. Tax rates can be as high as 23.8% on long-term capital
gains.
Fairholme Fund's performance has been mixed, with big swings
from year to year. But the fund still has a strong long-term
record. In the 15 years through Nov. 20, it gained an annualized
9.6%, while its peers gained 5.9% a year on average and the S&P
500 index rose 5%, according to Morningstar. The fund is down 2.2%
this year through Nov. 20, while the S&P 500 has gained 3.4%,
Morningstar said.
Fairholme Capital Management LP sold nearly 18.1 million shares
of AIG in the third quarter, leaving it with about 743,000 shares,
according to regulatory filing made by the firm. In addition, the
firm sold nearly 48 million shares of Bank of America, leaving it
with 27.5 million shares, according to the same filing.
Write to Daisy Maxey at daisy.maxey@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
November 23, 2015 16:21 ET (21:21 GMT)
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