Super funds need to understand the differences between using a custodial solution and a specialist implementation manager before making a decision, Parametric Portfolio Associates believes.
The firm released their after-tax report on Monday comparing the choices of propagation and tax-managed centralised portfolio management (tax-managed CPM) as they are becoming the top two choices when funds consider the topic of investment tax leakage on super portfolios.
Parametric's research and after-tax solutions director, Raewyn Williams, said the investment adviser was concerned that there is little practical information to help funds to make the choice.
"The results show a significant basis points return increase each year form tax-managed CPM versus propagation. Many fund decision-makers will be surprised at the size of this return difference," Williams said.
"Our research identifies portfolio characteristics that could increase the value the custodian provides through propagation. However, the structure of tax-managed CPM gives you innate propagation as well, something that is not yet widely appreciated.
"So any benefit that a fund would expect from using its custodian's propagation service is also delivered naturally by a CPM portfolio."
Williams noted there are legitimate reasons as to why funds might opt for a ‘light-touch' solution like propagation and after-tax solutions are always a question of ‘best-fit' for a particular fund.
"Inefficient implementation has real, even if not measured, costs to superannuation funds and members," she said.
"Any steps a superannuation fund takes towards managing the tax consequences of its investment activities is a welcome step forward and away from the tax-naïve traditions of the past."
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