Mercer has launched an Australian shares fund which highlights the benefits of tax-aware portfolio construction for various investors, especially those which don’t pay tax, such as foundations and charities.
The firm published a client note on the fund, which is open for tax-exempt investors, saying: “At Mercer, we believe that tax-exempt investors have a distinct advantage in maximising after-tax total return from Australian share investments provided they are tax aware and have the flexibility to design and construct bespoke portfolios attuned to their tax status.
“Simply having a dividend yield bias is not optimal. Investors need to maximise the capital growth plus dividends plus franking credits equation…”
Mercer says that focusing on higher dividend-yield stocks can lead to lower returns and higher risk, due to increased sector or stock concentrations. A company’s sharply rising dividend may, in fact, be a sign of distress.
“Attention needs to be paid to the company’s future earnings and the cash flows that will be used to fund future dividends payments. Emphasis must be placed on the sustainability of future dividends,” the note says.
Using the example of the BHP share buyback of 2011 – one of the largest in the history of the Australian market – Mercer points out that non-tax-paying investors who participated received a 19.1 per cent gain, while investors on the top tax bracket of 46.5 per cent suffered a 17.2 per cent setback.
There have been 41 off-market share buybacks in Australia between 2001 and 2011.