Fidelity said about 85 percent of its 2014 capital gains were long term in nature. And 80 percent of customers at the company, which manages about $2 trillion in assets and is the No. 2 mutual fund company behind Vanguard Group, are in tax deferred portfolios such as 401(k)s and other retirement accounts anyway.
Stout Returns
Investors may not care so much about tax implications if they get the sort of returns put up by Fidelity's $12 billion OTC Portfolio. Run by portfolio manager Gavin Baker, the fund's 2014 total return of 16.49 percent beat the S&P 500 Index by 2.8 percentage points and its 2013 return of 46.5 percent beat the benchmark by a resounding 14 percentage points.
Baker's portfolio turnover tends to be higher than peers, producing a higher percentage of short-term gains. Last year, 45 percent of his fund's capital gains distributions were short term, or more than double the estimated industry-wide average.
Fidelity's Cohen said tax efficiency moves are not always compatible with producing total returns.
But sometimes they are. Oakmark Fund star manager Bill Nygren highlighted a number of strategies he uses to dampen shareholder tax liability. Since 2000, the Oakmark Fund's short-term capital gains have been about half of one percent.
The Oakmark Fund's 3-year, annualized tax-adjusted return is 21.34 percent, slightly better than the 20.58 percent produced by Fidelity OTC portfolio manager Baker. Both funds are better than 90 percent of their peers on that measure, according to Morningstar Inc.
"We want to minimize the hole in the donut lost to taxes, but do so without reducing the size of the donut," Nygren wrote in his most recent market commentary.