Concern For Cap Gains At Domini
As expected, Domini shareholders rubber-stamped the transition to active management at a special shareholder meeting in August. The fund will transition to the new, actively managed portfolio over 60 days, beginning in December.
The date is carefully chosen to spread the inevitable capital gains that will arise over two calendar years. The new portfolio will hold just 80-100 stocks, according to Domini's chief investment officer, compared to 400 stocks in the current portfolio. Shedding 300+ stocks, including some that have been held for 15 years, will likely throw off serious capital gains, and shareholders would be wise to consider the tax implications of the transition.
Although the situations are not directly comparable, when Fidelity's Magellan switched managers and management strategy earlier this year, the fund hit shareholders with a capital gains distribution worth a staggering18 percent of the fund's net asset value.
In the end, Domini is asking a lot of its shareholders, requiring them to:
1) Embrace an active management strategy, with the attendant risks, and with the wealth of historical data showing that active strategies underperform indexes.
2) Pay an extra 20 basis points per year in expenses.
3) Shoulder capital gains distributions stemming from a wholesale shift in portfolio strategy.
For index shareholders, that's a lot to take……