Funds That Double Your Pain

April 9 -- This tax season, you may be feeling pretty cranky as you prepare to shell out taxes on the same funds that lost you money last year. You have every reason to be.

According to a study from Wiesenberger/Thomson Financial, last year saw the biggest, nastiest capital gains distributions in more than two decades.

In the same year that nearly half of U.S. equity funds lost money, 38 percent of them also distributed capital gains. The average distribution for a domestic equity fund was 9.19 percent — the highest distribution, as a percentage of net asset value, since at least 1979.

As ugly as the situation may seem, though, console yourself with the thought that it probably could have been worse. That's because the average capital gains distribution of 9.19 percent pales next to the worst-case scenarios. (Of course, if you own funds through tax-deferred accounts, you don't have to worry about the cap gains distributions.)

Unemployment Holding Steady, So Far

Exhibit A: According to Wiesenberger, a tiny, $2 million UAM Sterling Partners Equity fund socked investors with the biggest capital gains distribution, as a percentage of the fund's value, of any of the 6,087 U.S. equity funds in existence. It distributed a stunning 97 percent of its net asset value.

According to Morningstar, the fund is mostly held by institutions, not individual investors. But those shareholders can't be too happy: On top of the capital gains hit, UAM Sterling Partners Equity has struggled along in terms of performance, barely keeping its head above water in each of the past two years.

According to Wiesenberger senior analyst Ramy Shaalan, if you'd invested $10,000 in the fund at the beginning of 1999, you'd have ended year 2000 with only $10,187.

But because of massive capital gains distributions, your total taxes would amount to $4,966, assuming the gains were short term and that you pay taxes at the top rate of 39.6 percent. (Under new rules, the Securities and Exchange Commission has mandated that funds assume the highest rates apply when they determine how much investors would pay in taxes.)