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November 2004 performance review

December 16, 2004

No funds in this portfolio are issuing a capital gains distribution that warrants the selling of the fund to avoid a tax hit. We do advise new investors who are just adding a stake to wait until after the record date to purchase this portfolio’s funds in a taxable account.

Harbor bond is paying out about $.40 per share or 3.3% in year end distributions, about 2/3rds of which is high tax.

American Century International Bond paid out about 3.3% to shareholders of record 12/6/04, and virtually all of it is ordinary income from bond interest. New money has watered down the dividend, and the fund had some losses from when the dollar was strong a few years ago. 

Although there is no big dividend planned (thanks to past losses and big inflows) Vanguard High Yield Corporate has a 1%/360 day redemption fee.

There is generally very little in year end distributions with bond funds. Bond funds pay out the income they receive from bonds in the portfolio during the year, either quarterly or monthly, so there is little in stored up income to distribute. There is generally very little capital gains made owning bonds, compared to stocks.

In theory you could avoid a small taxable income dividend by selling a fund a day before the distribution and getting a slightly higher NAV. This could be taxed as a low tax long term capital gain tax rate assuming you owned the fund for over a year. Shorter term holdings are not worth selling at a gain as the tax hit is just as bad as the distribution. 

In a good year or two for bonds, the manager may have realized some capital gains selling bonds at a profit. 

The worst distribution was in one of the best funds. Artisan International Small Cap paid out an 11.38% distribution to shareholder of record on 11/17/04. As this fund has a 2%/90 redemption fee, and most of this dividend was low tax long term capital gains, it is unlikely it was worth avoiding. 

SSgA Emerging Markets paid a 3.92% distribution in October, but with a near 90% return since we added it we can’t complain. The fund has a 2% redemption fee for 60 days.