TAXES

Like it or not, taxes are a way of life in the mutual fund arena. Even if all of your fund investments are chucked into qualified retirement accounts, there will come a day when taxes on them come due. But for those holding their funds in personal portfolios, the end of each year generally brings with it a 1099 notice stating that Uncle Sam is due x amount as a result of your fund investments.

Fund families do their best to get the word out as quickly as possible to notify shareholders of the tax consequence they face, many sending out the data, publishing those numbers on their web sites or making that information available to shareholders calling the fund family and asking.

The Vanguard Group is going one step further: As well as notifying their shareholders with dividend and capital gains data, they are publishing the after-tax performance returns on 47 of their stock and balanced funds. Taxes, after all, chip away at the total return your fund has provided. So knowing how much is a nice touch.

If you're not a Vanguard shareholder, however, the pros says investors can estimate their equity fund's after-tax return by deducting between 2 and 3 percent off of the fund's total return. While not carved in granite, doing so can give you an idea of your fund's after-tax total return.

If you're totally opposed to paying taxes of any kind fund investments, check out tax-managed funds.

Pete Woodworth is the portfolio manager of State Street Research's Legacy Fund, ( 800-562-0032). Woodworth has been in the investment business since the 1960's and managing this fund, which he designed, since its inception in December 1997. He says managing a fund like this is "extraordinarily simple".

"I do the same thing that individual investors normally do with their own portfolios. Which is, when they decide to sell something for whatever reason, and they've realized a gain on the sale, they then go back into their portfolio and find a loss to offset the gain," Woodworth explains.

The technique has worked well for him. Last year, shareholders in his fund had a 1 penny capital gains tax to contend with. This year, Woodworth expects shareholders to have zero tax liability. "My commitment is to deliver a 1099 at the end of every year which has nothing but zeros on it for the holders of this fund. No current income, no short-term capital gains. No long-term capital gains," he says.

Tax efficient portfolio management doesn't automatically mean a fund will give up something on the performance side, or have a portfolio that's forever turning over, either.

"What you do have to do, is buy very good companies with above average earnings prospects and strong managements and hold them," he says."But the great thing is, most of the great fortunes in the investment business have not been made by people who have high turnover portfolios. Most have been made by people buying, or starting, great companies and holding on to the stock for very long periods of time."

With 36 large cap companies in the fund's portfolio, nearly all non-dividend paying ones, the performance goal of the Legacy Fund is beat the S & P 500. Which it did in 1998, and has through the first nine months of 1999.

What investors won't get out of tax-efficient funds no matter who is managing them are things like dividend or interest income. So, if income is a must for you, forget tax-managed funds and eliminating 1099s.

But if you're keen on growth companies and like avoiding the long arm of the IRS, while tax-managed funds can't guarantee that each and every year there will be no tax liability from them, they all share the same goal: Limiting, if not fully eliminating, a fund's tax consequences.