(Pictured: Raewyn Williams)
Parametric, the after-tax and implementation manager, has put some form and context around the regulatory push and increased general awareness of the importance of managing money on an after-tax basis. A new paper sets out what managers should and should not do.
The paper, written by Raewyn Williams, a former manager and consultant who joined Parametric in Sydney in March, says that while APRA has instructed super funds to consider tax and costs and is now measuring those imposts, there remains confusion as to the best way to go about this.
According to APRA figures, investment taxes borne by super funds collectively total $3.25 billion a year, and costs from investment management and implementation total $2.54 billion a year.
It’s easy enough to work out how to reduce investment management costs – squeeze managers generally, reduce alternatives and go more passive – and then to decide whether this is worth it on an after-returns basis. But the tax issue is rather more complex, which is probably why it has taken so long for funds and their consultants to get onboard the potential savings to members.
Williams’ paper is entitled: “What Should Managers Manage?” In a similar vein, Parametric is presenting a session at the Australian Superannuation and Investment Conference in Alice Springs in September on the topic: “Is Smart Beta Still Smart After Tax?”
Williams started her career as a tax lawyer at KPMG and then went into funds management, first at Barclays Global Investors and then at QIC. QIC’s biggest client at the time, QSuper, advised the manager in 2007 that it wanted its $25 billion managed on an after-tax basis, which became one of Williams’ biggest challenges. News of her success preceded her and she was offered a job at Russell Investments, in the same field, in 2010, where she stayed until joining Parametric, an Eaton Vance affiliate firm.
Her paper, published this month, argues that unless they are providing a specialist “centralised portfolio management” (CPM) service, fund managers should not attempt to consider all taxes in relation to their client funds.
Managers should manage to maximise franking credits and the benefits of off-market share buybacks and to minimise withholding tax, assuming the client can benefit from that. The paper calls this managing “tax clienteles” whereby sophisticated managers can consider withholding taxes depending on the individual client’s position.
What managers should not do is take a holistic approach such as: managing asset class tax differentials; income and revenue gains tax; capital gains tax; structure and domicile arbitrage and foreign income tax offsets. These should be left to the CPM manager.
The paper refers to a live example of a super fund which used a CPM manager, presented to the CMSF conference this year. The fund achieved an uplift in after-tax returns, net of all CPM costs, of 90bps a year on its Aussie equities portfolio and 110bps a year on its international equities portfolio. This was achieved with virtually no change to the investment risk profile of the portfolios.
The concept of CPM is not a new one, but Parametric is the first to apply after-tax thinking to CPM. In the early 2000s it was referred to as a “master manager” and QIC and its custodian, National Australia Bank, sang its praises and attempted to drum up interest in the concept. Not all fund managers were agreeable to having another firm take over the implementation of their investment decisions to allow for effective netting and so on (whereby if one manager is buying BHP and another selling, for example, the crossing should be made intra-portfolio). But times have changed and in a lower-return environment and with more after-tax awareness by the super funds themselves, the industry is much more relaxed about changing its processes to accommodate a CPM manager.
View the full paper.