EXPLAINED: How Victory Capital Portfolio Managers Screwed Fundholders by Taking "Easy Way Out" Racking up Huge Cap Gains Taxes

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Prolific Contributor

To be clear, I've never entrusted USAA or Victory Capital with my investments. I'm an equity portfolio manager with 25 years investment experience and co-managed over $7 billion in assets (including a Morningstar top-rated mutual fund) at a premier  investment management company.

 

I've noticed several questions about people experiencing huge capital gains and wanted to explain what's going on from an "insider's" perspective. This situation is a classic move by lazy portfolio managers when a fund is merged into another one. It's possible the fund was liquidated first, then transferred over to Victory, which would've made the sale unavoidable.

 

You're getting huge capital gains taxes because, assuming the funds were mergerd, Victory Capital portfolio managers decided to sell every stock they don't own in their "model portfolio" (regardless of the investment merits of the company shares USAA portfolio managers purchased) and buy every stock in the model portfolio not owned.

 

They could have "transitioned" the accounts (selectively selling off the stocks they believe are overvalued and replacing them with companies in the model portfolio with the most upside potential), but that takes "too much work." The impact on you is tax inefficiency and higher transaction costs (commissions, bid-ask spread, market impact, taxes) reducing after-tax returns.

 

It also is an indication of poor client focus. Firms that put their clients first, which ALL investment managers are OBLIGATED to do since they are fidiciaries (by law, they must put clients' interests ahead of their own). If you Google "fidiciary duty money manager," you'll find, "Fiduciary financial advisors hold a relationship of trust with their clients and abide by fiduciary duty. Fiduciary duty is the ethical obligation to act solely in someone else's best interest.

 

Doesn't matter if the stocks owned in the fund were undervalued and likely to increase in value. They're not in Victory Capital's current portfolio right now so out they go! What's that mean for you? First, if there are capital gains then increased taxes. One thing smart portfolio managers do is sell stocks with losses to offset those with capital gains to eliminate (or at least reduce) taxes. But that takes time and effort.

 

I believe the monthly (it may be quarterly) stock holdings are publicly available. Check out what was owned before Victory Capital took over and what they bought and sold. Pretty sure this is on Morningstar, but not positive. I know it's out there because mutual funds are required to disclose the information by the SEC.

 

Don't be surprised to see Victory Capital buying - at higher prices - stocks they recently sold (or selling - at lower prices - stocks just after they bought them). This increases transaction costs (commissions, market impact, etc.) and taxes thereby LOWERING YOUR INVESTMENT RETURNS.

 

As stated, I'm not a Victory Capital fundholder and definitely wouldn't become one. I'm posting this simply to share my perspective on what's likely happening with some Victory Capital fundholders who were hit with large capital gains.

 

Please "like" this post if you want me to provide more information on what's going on with the fund and continue watching what's happening with your investments. Also, feel free to message me directly with any questions.