As superannuation funds invest in a taxable environment it often cuts short or delays what should be a natural, healthy process of super equity portfolio evolution, according to Parametric Australia.
Parametric’s latest research said the tax roadblock meant that for funds to step forward in the portfolio evolutionary chain it could require a fund to write a cheque to the tax office.
“Our concern is that, on its face, baulking at a single, upfront tax cost sits rather uncomfortably with an espoused commitment to long-horizon investing,” it said.
“The important task of evolving equity portfolios may be stymied by upfront tax costs and suggests a framework super funds can use to solve this problem.”
The paper suggested using a break-even analysis to model the potential returns from an outlay to determine the point at which the outlay was recouped, after which future returns made the idea or initiative net profitable.
It said important evolution of a fund’s equity portfolio was halted due to “harmful behavioural biases and is fundamentally inconsistent with the fund’s nature as a long-term investor”.
“What stops superannuation funds from applying a break-even analysis to this problem is not a lack of familiarity with the concept. More likely, it is the difficulty of estimating the pay-offs from moving to a better investment structure – in essence, funds can solve one side of the equation (the initial tax cost of moving) but not the other. Funds know the pay-offs are there, but they aren’t easily estimated,” the paper said.
“The qualitative benefits of using a better investment structure (flexibility, transparency, ability to customise) also bolster funds’ commitment to evolve, but aren’t easily weighed against the hard number of an up-front tax cost.
“A couple of behavioural biases play into this fixation on the immediate tax cost: availability bias, which makes it easier to support a decision based on a to-hand, hard-and-fast number; and recency bias, which places extra weight on the immediacy of the tax cost and downplays the value of future benefits. Applying a more scientific process, like the break-even framework we propose, is a way to overcome these biases.”
