Focus on tax to drive increased returns

14-Apr-2016

By Sarah Kendell

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The average superannuation fund could boost its annual returns by as much as 90 basis points by focusing on tax efficiency when implementing active management strategies, according to fund manager Parametric.

Speaking to financialobserver, Parametric head of research Raewyn Williams said fund managers often forgot it was how a particular strategy worked in practice, not in theory, that super fund members and investors really reacted to.

“There is this whole area that has never been explored before and that’s the concept that your best ideas are only as good as their implementation, and how much leakage is there going from your best ideas to actually creating a real-world portfolio?” Williams said.

“What actually builds retirement wealth for a member is a post-tax return, so whenever you are thinking about pre-tax returns, you are actually not thinking about the thing that the member cares about.”

By focusing on the aspects of a fund member’s return they could control – namely the tax implications of particular trades – managers should be able to boost overall returns for the super funds they were investing on behalf of members by an average of between 50 and 90 basis points a year, she said.

“CGT (capital gains tax) in particular is a big source of value add – the discount rule means if a super fund trades assets they have held for less than 12 months, they pay 15 per cent, but if they hold it for over 12 months, that drops down to 10 per cent,” she pointed out.

“That comes back to weaving tax into the thinking of the portfolio managers so that in some situations where there is a sell signal with a particular stock that is going to last for a while, can they wait four days or whatever is needed to drop the tax bill by 5 per cent.”

Those considerations were particularly relevant given the long-term low-return environment super funds now found themselves in, with global market growth predicted to be subdued for some time and new return sources becoming increasingly scarce, she said.

“Years ago super funds got together and formulated their investment objectives and communicated them to all of their members, and it was based on a whole lot of pre-GFC (global financial crisis) market conditions that made sense and were realistic,” she said.

“What’s happened now is that super funds are saying: ‘I don’t know how I’m going to deliver on these investment objectives – I either go back to my members and revise them downwards, and that’s a pretty tough communication, or I’ve got to find a way to be clever and make the money and strategies I have work harder.’”

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