Ask MAX: Did My Fund Fall 41% In One Day?

December 7, 2007

Bobbie asks:

Can you please tell me what happened to the Fidelity Advisor Korea A (FAKAX) fund? It dropped 41% in one day. I have been holding this for many years and didn’t hear anything negative news that would have caused this."

On December 5th Fidelity Advisor Korea fund (FAKAX) paid out $3.06 worth of short term capital gains (taxed as income if you own the fund in a taxable account) and a whopping $13.03 of long term capital gains – a total of $16.09 or 42% of the fund price. These payouts are tax events – not actual drops like you see when fund investments fall.

Depending on what box you checked when you invested, you’ll either get a dividend check in the mail in the amount of 42% of your investment in the fund, or (more likely) the 42% dividend was reinvested for you into more shares of the fund. Either way you didn’t actually lose 42% of your money overnight. In fact the fund was actually up slightly on December 5th, adjusting for the distribution.

The bad news is if you own this fund in a taxable account (outside of an IRA or 401K), you’re on the hook for the taxes due on this amount come April 15th.

Distributions of this size are very rare and generally the result of a fund with a hot track record that either sees big outflows of money by shareholders or is one in which the manager decides to change the portfolio holdings significantly. Either situation means the fund has to realize capital gains on appreciated stock.

If shareholders leave the fund, the manager has to sell stock to raise cash. Selling stock in a hot fund generally means realizing capital gains - gains that have to be paid out to the remaining shareholders.

In the case of Fidelity Advisor Korea we suspect the manager sold many of the holdings in anticipation of merging the fund into Fidelity Advisor Emerging Asia (FEAAX). This merger has been planned since early this year, and the fund was closed to new investors in March. There was likely some shareholder redemptions from the fund, reducing the number of investors left to pay the distributions to.

For more on year-end fund distributions, click here.

Thanks for the question.


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Lower Share Price After Distributions
Anonymous — POSTED December 23rd, 2007 5:10PM


Because the price per share is much lower after these distributions, is it a good time to put more money into a fund, even if the value of the fund has not really fallen?