T. Rowe Price OTCFX - Huge Cap Gain

[Toddo]

I invested $600 in Over-the-Counter Securities Fund, run by Ralph Coleman as I recall, in 1969, and reinvested dividends ever since. It's now called T. Rowe Price Small-Cap Stock fund, OTCFX, and my position there is now worth over $300k - the beauty of compounding!

But this year T. Rowe Price is projecting a cap gains dividend of $8.60, about 12.3%. That's over four times what was distributed the last couple of years, and over twice any distribution in the past 20 years, and is obviously raising havoc with my withholding. Anyone have any idea what the cause of the sudden jump is?

I'd love to have this money invested in a more tax efficient security, but even accounting for tax on re-invested dividends, my basis is only 50%. We're in the 24% + 3.8% NIT Federal bracket and %5 state, so selling is not at all attractive. I'm 83 so just dealing with it and passing it as an inheritance seems like the best strategy. Is there a better one?

[typical.investor]

I invested $600 in Over-the-Counter Securities Fund, run by Ralph Coleman as I recall, in 1969, and reinvested dividends ever since. It's now called T. Rowe Price Small-Cap Stock fund, OTCFX, and my position there is now worth over $300k - the beauty of compounding!

Nice!

But this year T. Rowe Price is projecting a cap gains dividend of $8.60, about 12.3%. That's over four times what was distributed the last couple of years, and over twice any distribution in the past 20 years, and is obviously raising havoc with my withholding. Anyone have any idea what the cause of the sudden jump is?

Yes, the fund is changing positions and realizing cap gains in the process. I have had funds do similar (well more actually). It's not unexpected for an actively managed mutual fund and impossible to predict.

I'd love to have this money invested in a more tax efficient security, but even accounting for tax on re-invested dividends, my basis is only 50%. We're in the 24% + 3.8% NIT Federal bracket and %5 state, so selling is not at all attractive. I'm 83 so just dealing with it and passing it as an inheritance seems like the best strategy. Is there a better one?

I would:

1) turn of dividend reinvestment and put the dividends towards a more attractive investment or simply use them to fund spending
2) look for tax loss harvesting opportunities to offset the gains you would incur by selling

[sycamore]

I invested $600 in Over-the-Counter Securities Fund, run by Ralph Coleman as I recall, in 1969, and reinvested dividends ever since. It's now called T. Rowe Price Small-Cap Stock fund, OTCFX, and my position there is now worth over $300k - the beauty of compounding!

But this year T. Rowe Price is projecting a cap gains dividend of $8.60, about 12.3%. That's over four times what was distributed the last couple of years, and over twice any distribution in the past 20 years, and is obviously raising havoc with my withholding. Anyone have any idea what the cause of the sudden jump is?

I'd love to have this money invested in a more tax efficient security, but even accounting for tax on re-invested dividends, my basis is only 50%. We're in the 24% + 3.8% NIT Federal bracket and %5 state, so selling is not at all attractive. I'm 83 so just dealing with it and passing it as an inheritance seems like the best strategy. Is there a better one?

1) Stop any dividend/cap gain reinvestment.

2) Giving away shares to one's family or other individuals now means the gift recipient also gets your basis. Maybe some of those individuals are in a low (or lower) tax bracket and they could sell the shares and not have to pay much in taxes.

3) Do you have plans for charitable donations? If yes, consider moving the donation to while you're alive. This would (1) reduce your holdings of an asset with large unrealized gains, and (2) help reduce your current year taxes if you itemize the donation on your tax return.

Often with a large donation people will donate to a Donor Advised Fund so you get the tax deduction benefit of a large donation in one year, but you can spread out your requests to distribute the DAF over multiple years.

[Geologist]

One reason an actively managed fund can have a jump in capital gains distribution is if there has been a manager change. You should be looking at reports or the prospectus from the fund/T. Rowe Price to see what is going on with the fund (this is a good idea in general).

[Toddo]

I would:

1) turn of dividend reinvestment and put the dividends towards a more attractive investment or simply use them to fund spending
2) look for tax loss harvesting opportunities to offset the gains you would incur by selling

Thanks. I moved this holding from T. Rowe Price to Fidelity this year and turned off reinvestment, so the funds will now available for other investments as you suggest. Not needed for spending in the foreseeable future.

We sold our only underwater investment last year. Our "inherited" (actually gifted) holdings have 1% to 10% basis and our "real" investments are in funds with around %50 basis, so don't see opportunities for future tax loss harvesting

[Toddo]

1) Stop any dividend/cap gain reinvestment.

Thanks. As I just posted, I did that earlier this year. Guess I should have found this board sooner.

2) Giving away shares to one's family or other individuals now means the gift recipient also gets your basis. Maybe some of those individuals are in a low (or lower) tax bracket and they could sell the shares and not have to pay much in taxes.

I'm pretty sure my intended heirs are in just as high brackets. I'm not sure I'm ready to gift to grandchildren, some whom would be in lower brackets.

3) Do you have plans for charitable donations? If yes, consider moving the donation to while you're alive. This would (1) reduce your holdings of an asset with large unrealized gains, and (2) help reduce your current year taxes if you itemize the donation on your tax return.

We gave up itemizing when the standard deduction was raised, and switched to QCDs for charitable giving. Without charitable donations our itemized joint deductions are only $10k. So around $20k in deductions would be lost if we were to go for using current charitable giving as deductions. My wife had earmarked her IRA and 401.k to charity, which could be re-worked as appreciated stock donations. But I don't know that we are ready to donate those funds yet. We'd need to think about that.

[Toddo]

One reason an actively managed fund can have a jump in capital gains distribution is if there has been a manager change. You should be looking at reports or the prospectus from the fund/T. Rowe Price to see what is going on with the fund (this is a good idea in general).

Good point.

[Electron]

Morningstar reported that Alex Roik took over as portfolio manager of the fund in January 2024. Frank Alonso was the previous portfolio manager and remains with the firm in an advisory capacity.

I also hold quite a few shares of OTCFX in a taxable account and first invested in 1998. A tax hit of this magnitude is never welcome.

In 2018 Harbor International fund appointed a new advisory firm and the capital gains distribution was the highest percentage I have ever seen. This is one of the risks in holding an actively managed fund.

[Toddo]

Morningstar reported that Alex Roik took over as portfolio manager of the fund in January 2024. Frank Alonso was the previous portfolio manager and remains with the firm in an advisory capacity.

I also hold quite a few shares of OTCFX in a taxable account and first invested in 1998. A tax hit of this magnitude is never welcome.

Thanks. That's at least an explanation, I suppose. No, not welcome.

That information was sure not easy to find. The 2023 annual report included it in a footnote at the very end, under the list of officers. The third quarter "Fact Sheet" lists him as manager and shows since 2023. Otherwise, nothing I can find from T. Rowe Price.