Tim Wong: Dividends and realized capital gains are the two primary sources of income for equity funds. We have assessed the income distributions of a sample of 34 Australian large-cap equity funds across a period from 11 years up to 2017. As you'd expect, dividends have been a relatively steady component of income with franked dividend yields typically varying between 2% to 6% or an averaging about 4% per annum. On the other hand, realized capital gains can vary greatly from year-to-year. Obviously, they aren't guaranteed. Furthermore, large fund flows can have a major impact. Investor outflows can cause funds to crystalize and distribute large realized capital gains as we've seen several times over the years.

Income-oriented Australian equity strategies have generally lived up to their ability. These funds have typically delivered above-average franked dividend and distribution yields compared to the broader cohort. Interestingly, (indiscernible) have adjusted the processes in their income strategies in order to generate high levels of distributable income. The former implemented a derivative overlay strategy, while the latter relaxed its capital and financials. These changes have helped to further distinguish these funds from the rest of their broader Australian equity lineup.

Funds with a stronger growth tilt may distribute a lower level of income at times. Fidelity Australian Opportunities, Bennelong Australian Equity and Platypus Australian Equity are three such examples. This makes sense as a stronger focus on earnings growth may lead these managers away from high dividend-paying stocks. High fees can be another factor. Fees are paid out of the funds income and can be abnormally high when a performance fee is earned. When this occurs without commensurate net realized capital gains, investors can be left with a slim distribution. This occurred to Platypus Australian Equity and Ausbil 130/30 Focus when each beat their benchmarks soundly in 2016 and 2017, respectively.

Lower portfolio turnover is normally expected to lead to more tax-effective tax results, as this should ordinarily translate into a high proportion of gains and subject to the discounted capital gains tax rate. However, this hasn't eventuated.

Rather than when the turnover is irrelevant this highlights some complicating factors. High levels of tax loss carryforwards following the 2008 market crash have seen few funds actually realize any capital gains for several years thereafter. Even though with strong track records such as Fidelity Australian Equities, Nikko Australian Share and Schroder Australian Equity. Further clouding these results are large redemptions that crystalize capital gains. Meanwhile, some level of turnover can help to manage your funds tax cost base and limit the potential for a chunky portion of taxable realized capital gains and distributions. This requires sensible tax loss management to offset capital gains and losses and refresh the portfolios cost base.

Unfortunately, investors don't have ready access to a fund's embedded capital gains and losses. We believe that investors could benefit greatly from more disclosure of this information.

Our research paper on this topic "The Ins and Outs Of Income And Tax For Australian Equity Funds" is available in Morningstar's products, including Advisor Research Center and Morningstar Direct.