Overall I believe you shouldn't have actively managed funds in taxable accounts except for tax-managed funds or municipal bond funds. But Index funds are best.

However,I currently have Primecap Core in my taxable account. It has experienced management, a low tax ratio and only a 10% turnover according to Morningstar. Of course these things could change. I have only had the fund for three months so if I sell I will be subject to short term capital gains (33% bracket) as well as a  10% redemption fee from Vanguard. I would still come ahead though. My tentative plan is to dump it and replace it with Total Stock Market and FTSE World index, and possibly buy Primecap for a small portion of my IRA (which would otherwise consist of all index funds).  

Advice? 

 

 

 

[quote user="MarcAlan"]However,I currently have Primecap Core in my taxable account. It has experienced management, a low tax ratio and only a 10% turnover according to Morningstar. Of course these things could change. I have only had the fund for three months so if I sell I will be subject to short term capital gains (33% bracket) as well as a  10% redemption fee from Vanguard.[/quote]

Given the fund's recent gains, I would suggest waiting until the gains become long-term; you will get rid of the redemption fee, and reduce the tax bracket from 33% to 15%, so the total cost of selling after a year may be less.  In addition, Primecap Core, as a low-turnover fund, is not likely to cost you too much extra in taxes.  (I would still advise getting rid of it if the costs aren't too great; you may have a big tax bill when the fund changes managers.)

If the market happens to wipe out your gains before the year is out, that would be a good time to sell (and replace with Total Stock Market).  However, note that if you sell at a loss, you cannot deduct the loss if you buy the same fund in your IRA within 30 days before or after.

 

Hi Marc:

I agree with Grabner and his recommended procedure for exchanging the fund.

I know that it is difficult to sell a top-performing (large-cap growth) fund.  However, even the government requires a warning that past returns do not guarantee future returns. 

It is very important to hold only tax-efficient funds that you can hold "forever" in taxable accounts.  The tax-efficiency of managed funds is very likely to change and presumably you have many years of investing ahead.

 Follow Grabner's very sound advice.

 Best wishes.
Taylor

Marc:

Let me offer a contrary viewpoint.

A little more than 4 years ago, we had a similar conversation in which a poster was convinced to sell Primecap and buy TSM. (Here's a link to that conversation.) I chimed in and stated I thought it was a bad idea. 

This conversation lead to a bet between me and a DFA advisor, in which we assumed $100,000 was invested in both funds.  here is where we stand today:

• Primecap: $143,202
• TSM: $134,662

Moreover, the tax cost ratio over the past 5 years is .5%, for TSM it is .27%.

I personally do not think deferring (not avoiding) .23% a year of taxes is a basis to select a fund.  In this instance, I'd go with Primecap Core if you like the fund.  Don't let the tax tail wag the return dog

Petrocelli 

 

I greatly appreciate the advice.

I bought primecap core when it came out and  have been very happy with it and a 10% gain.I plan to hold it for a long time . I like the management.  I have had primecap for years and  it has been one of my best funds.

well?

1. Are  talking about having $50,000 or more in this?

2. And your in a Higher Tax Bracket?

3. Otherwise I wouldn't be a Penny Wise and a Dollar Foolish trick

Go for the Best Rtns, pay the tax and go for it..

IRA's have a downside.. You end up paying alot more taxes on it when you have to start taking it out..It's the old Bait and switch game...And Wonder why so many Are switiching to Roths..

Of course, Just IMHO after going thru all this phase and being retired now..

 

Large cap growth is a relatively tax efficient asset class.  This is a Vanguard fund with relatively low turnover.  You could do a lot worse in taxable.  This might be better than many small cap index funds.  I certainly would not pay a redemption fee nor short term capital gains to make a switch.  I might not even pay long term capital gains.  I wouldn't reinvest dividends/capital gains distributions and I wouldn't put more money into it either though.

Where would you transfer the capital gains/dividends to?

I currently have a tax-exempt MM with Vanguard as well as the tax-exempt int term bond fund.

[quote user="MarcAlan"]

Where would you transfer the capital gains/dividends to?

I currently have a tax-exempt MM with Vanguard as well as the tax-exempt int term bond fund.

[/quote]

 

If I had a significant taxable account, I would have the capital gains/dividends paid into the appropriate money market fund for my tax bracket.  My new taxable investment money would also sit there until I hit something like $5K or $10K at which time I would purchase Total Stock Market or another appropriate taxable fund or ETF. 

Are you guys talking about Vanguard Primecap Core Fund (VPCCX)? If so, I have this fund since last July and I see no gain. As a matter of fact, it's around 7% in the red.

Thanks, 

Thanks, Doc.

The tax ratio looks very compelling. The fund is also weathering the storm pretty well.

The PrimeCap team has a history of patience and low turnover in their portfolios.  I do not believe that they all of a sudden will become high turnover traders.  I own it.  Great management, the two founders worked at the American Funds, low expenses.  Stick with this great fund. 

Petro, what do you mean by"deferring (not avoiding) .23% a year of taxes"?

I'm quite clueless as to taxable investing at this point, so this is a very basic-level question. 

Thanks to Petro or anyone else who can explain this.

A regular IRA doesn't avoid taxes, it defers them.  You don't pay taxes on the money while you're working, but you pay when you take money out of the account.  A Roth IRA is the other way, of course - you pay taxes now, but don't pay later.  That's why a lot of people see the Roth as a better deal.  So the point is, doesn't make much sense to take a worse investment just to defer taxes.  

On the other hand, people often do too much comparison of real costs (fund fees, taxes, interest you owe on debt) to expected, theoretical future returns that may or may not occur.  Sure, actively-managed fund MIGHT control your tax bill, keep expenses down, and provide market-superior returns.  But you will be paying the taxes and expenses as a certainty, so it pays to minimize them.  Another example of this is the idea some people have that if you can borrow money at 5-6% on your house you should invest it in the stock market and try to make 8-10%.  The problem is that when the market sours, not only do you lose your investment wealth, but you also run the risk of losing your house as you suffer a decline in income.  Take care of debt and cost management first, then look for the profits. 

My 2 cents on the actual question is that Primecap is a fine choice for any type of account.  The fund is structured to really emphasize LTCGs, which are the best kind of profit to have in your taxable account, and surely the reason you have a taxable account is that you'd like to have more money in the forseeable future.  They pick value without really emphasizing dividends, and they hold for a long time.  Remember that those studies of the failure of active managers to beat index funds cover mainly funds with expenses 2-3x higher than VPCCX.  I'm a little leery of how much money the Primecap managers run, but at least they've closed the first Vanguard Primecap fund to vary things somewhat.