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Super funds ignoring after tax savings
Super funds may be missing out on an extra 50 to 100 basis points of return for members by not engaging in after tax investment strategies, according to Raewyn Williams, director of after tax investment strategies at Russell Investments.
The missed opportunities do not require a complete overhaul of investment styles or managers, but rather are something that can be added to existing investment strategies, Williams said.
There is a misconception among funds that tax is already being adequately managed because members receive after tax reporting, while investment managers themselves may be under the impression that after tax investment strategies would be costly or complicated to implement.
“The fact that your manager’s turnover is quite low doesn’t mean that’s the best you can do in an after tax sense. The reason there hasn’t been much traction is that super funds weren’t far enough up the learning curve to call investment managers on how simple their messages were, to push them harder on that.”
Williams highlighted several areas where managers could focus to earn an advantage from after tax investing.
Deferring tax paid on investments amounted to an interest free loan from the tax office and was one strategy that super funds should be particularly interested in because members who were approaching retirement who could defer tax until they had retired could gain a permanent tax saving.
Franking credits and withholding credits are another area to look at, as are other tax concessions around CGT discounting rules.
Next week’s planned Woolworth’s off-market share buyback is an example where managers will be able to use after tax strategies to add value.
“If you just consider whether they should participate in a pre tax sense they actually lose about 50 basis points of performance judged on a pre tax basis. But when you then factor in the franking credits, the tax benefits and measure it on an after tax basis there’s about 80 basis points benefit in that so they’re ahead 30 basis points,” she said.
Williams stressed that after tax investing need not be an expensive strategy, and there was the potential to dial down both the complexity and cost. “You can make radical changes or pick one or two areas that add a lot of value,” she said.
“In these days where alpha is quite scarce and we’re searching for every basis point it seems incredible that we’re ignoring an opportunity like this to add value to members.”
AUTHOR
Mike Taylor
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