Minimizing capital gains and maximizing tax efficiencies in a high- yield fund comes with the territory, according to Tom Conlin, a co-manager with Heartland Advisors Inc. in Milwaukee.
Managers with high-grade funds trade bonds in their portfolios more frequently than high-yield managers who "tend to (employ) a little bit more of a buy-and-hold strategy so there's not as many occasions to have a taxable event," he explained.
Although Conlin manages a $100 million high-yield municipal bond fund, he says he also runs the fund for total return.
Because interest rates have come down dramatically in recent years, Conlin said a lot of bonds may currently be in a position to offer gains.
But in that case, he harvests losses from other bond investments to balance the profits so that capital gains taxes are not transferred to shareholders.
"The last thing we want to do is have a big taxable distribution at the end of the year," he said.
"To the extent interest rates rise and bond prices come down again, it will certainly reduce the risk of a lot of gains in future years," Conlin continued.
Funds that produce large capital gains without offsetting them with the appropriate losses have not "done their job" when it comes to providing an authentic tax-free product to shareholders, according to Conlin.
At Heartland, there isn't much room for such uncertainty.
"We let (investors) know that we keep a close eye on our capital gains and actively work to harvest losses so that we are tax efficient," he said.
