Fixing implementation leakages would boost returns

Superannuation funds have an opportunity to control investment taxes and transaction costs instead of waiting for their portfolio to get their bets right, according to Parametric.

According to research by Parametric, super funds should respond to investment challenges such as low yield, scarce investment alpha, and a bear market by “controlling what you can control”.

Parametric managing director of research in Australia, Raewyn Williams, said that confusion about the value of managing investment taxes and transaction costs could be a factor in these areas of implementation leakage being overlook.

“We believe a good conservative guide to the value of an after-tax equity management approach, net of all fees and costs, is around 59 basis points annually,” Williams said.

VIEW ALL

View all

“For equity trading costs, it really depends.  But for a large-cap Australian equity portfolio, every $100,000 of equity trades could realistically cost a superannuation fund as much as $2,380 or as little as $420. 

We do know that few funds are getting execution-only ‘best price’ on their trades and advocate for funds to receive transaction cost reporting so they can start a discussion on this issue.

The research said it was illogical to focus on striping out fees when retiree fund members would benefit almost twice as much from their funds cleaning up implementation leakages.

“These controllable costs are positively correlated with portfolio changes.  The more changes your fund is planning, the more you are incentivised to put an efficient implementation platform in place before you instigate the changes,” Williams said.

“I understand the temptation to put off new ideas until the big changes are delivered, but superannuation funds with a busy change program should consider prioritising the initiatives that will make the rest of their changes easier to implement and less costly to members.”