A ‘super’ measure of global equity markets’ returns

Managers of Australian superannuation funds are under increasing pressure to provide more granular disclosure of fees and costs incurred by beneficiaries. In turn, this is leading to demands for a more accurate representation of the investment opportunity set.

Measuring global equity index returns for super funds

One form of indirect cost borne by super funds is taxation on dividend income, whether received from

investment in domestic or foreign equities. Given the growing demand for performance measurement net of costs, index providers can assist super funds and their beneficiaries by providing indices that accurately measure post-tax performance.

Currently, most Australian fund managers are measured against their peer group by asset consultants and research houses on a pre-tax (gross) basis. This not only makes comparisons between fund managers inaccurate (since the comparison fails to take into account the actual, post-tax performance of funds), but also risks distorting the investment decision-making process: for example, some investment decisions may appear attractive on a pre-tax basis but unattractive on a post-tax basis.

By convention, equity indices are calculated in price return and total return versions, with the first type of index recording equities’ capital performance, and the second type of index recording both capital performance and reinvested dividend income.

Equity index providers typically calculate (gross) total return and net total return indices, where investor returns will lie somewhere in-between the gross and net versions.

For gross, index returns are calculated on the assumption that dividends are received gross of tax (i.e., with no dividend withholding tax deduction). For net, index returns are calculated on the assumption that a deduction for withholding taxes takes place at the maximum rate.

For Australian super funds, neither of these options provides an ideal outcome. Equity indices calculated using a zero tax assumption would overstate the returns available from global equity markets, given that super funds do face taxes on their overseas dividend income. However, a standard net total return index would understate the performance opportunities available, because super funds may be able to obtain a more favourable dividend tax treatment than assumed in the index calculation.

An accurate representation of global equity markets for Australian super funds would therefore take into account the existence of withholding taxes and the dividend tax rates available to super funds. These rates are set by double taxation treaties, which are negotiated on a bilateral basis between countries worldwide.

The FTSE All-World ex Australia Net Tax (Super) Index provides accurate tax-adjusted equity performance for super funds investing in global equity markets by applying tax rates to dividends that are applicable to superannuation funds. The index is market-capitalisation weighted, representing the performance of large and mid cap companies in Developed and Emerging markets, excluding Australia. The index is comprised of approximately 3,000 securities from 46 countries, and derived from the larger universe of the FTSE Global Equity Index Series (GEIS), which covers 98% of the world’s investable market capitalisation.

In an environment of significant and increasing pressure for better disclosure of the fees and costs faced by investors, Australian super funds can benefit by using global equity benchmarks that more accurately reflect the dividend tax rates available under double taxation treaties.

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