PwC gets behind after-tax management trend

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(pictured: Stephen Jackman) 

PwC Investment Consulting has thrown its support behind the trend to after-tax management of portfolios with a new report which provides some of the questions super funds should be asking of their managers and custodians.

The report, ‘Ten Questions to Ask Your Investment Manager and Custodian on Tax’, says that tax is generally regarded as a “second order” issue in most investment arrangements compared with “more exciting” factors such as alpha and risk.

But tax-efficient management can add significant return – 50bps a year has been claimed – and, unlike alpha which may be illusory and volatile, tax efficiency gains are “real and consistent”.

PwC points out that there are a number of investment managers now offering tax-effective strategies, measurement, ‘propagation’ by custodians and centralised portfolio management (CPM).

“While the industry has come a long way with respect to after-tax management, we think it has further to go,” the report says. “We think it is incumbent on trustees to fully understand the tax consequences of their investment strategies and the capabilities of their investment managers.”

Funds should investigate propagation and CPM, the report says, and managers should be incentivized to provide better tax management.

The 10 questions are:

  1. Do you have a strategy to maximize after-tax returns.
  2. What impact does your style of investing and portfolio turnover have on the fund’s after-tax returns?
  3. Does the custodian efficiently allocate tax parcels and on what basis? What information is the custodian providing to you on what tax parcels are available?
  4. Do you consider tax implications before trading?
  5. Would you delay or bring forward an investment decision because of the tax implications?
  6. Do you participate on off-market share buy-backs?
  7. Do you manage the portfolio specifically for my tax status (individual, super, tax-exempt, pension)?
  8. Is after-tax performance systematically measured?
  9. Is the existing measurement of after-tax portfolio and benchmark returns conducted using a robust and meaningful methodology?
  10. Can you operate under a CPM approach?

While the report does not say it, some fund managers are known to be resistant to CPM because they feel that they are losing full control of trading and have a vested interest in supporting their own backoffice and protecting ‘soft-dollar’ research arrangements with their brokers.

Stephen Jackman, PwC director and consultant, and Marco Feltrin, PwC partner, are the main contacts at the firm overseeing its advice on after-tax management.

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