Russell’s After-Tax Survey:
-
Like-for-like: Russell compares four quarters’ worth of after-tex results for the first time.
Research validates objective of Stronger Super to compare like-for-like returns.
- Super fund members set to benefit from mandatory focus on after-tax performance.
Pre-tax performance is not the most effective means to evaluate investment returns, often materially understating the real value of franking credits to investors, according to new research by global asset manager, Russell Investments.
The Russell’s After-Tax Survey – produced quarterly – polled Australian equities managers with a range of strategies and styles, comparing returns on an after-tax basis for institutional and retail investors. This is the first time four quarters’ worth of results have been made available, highlighting investment trends and themes over a longer-term.
Russell Investment’s director of after-tax strategies, Raewyn Williams, said the research reinforces the benefit of the recently introduced Stronger Super reforms, which require the mandatory consideration of after-tax investment returns.
“For both advisers and the end investor, the results support the need to be mindful that the after-tax performance of investments can be materially different to pre-tax returns. The assumption that pre-tax performance measures are good enough is misguided – investors need a more complete picture of investment performance” she said.
The survey results suggest a move to an after-tax investment focus for Australian equities can generate additional returns annually on taxable accumulation options – around 45 basis points for conservative fund members, 65 basis points for balanced option members, and 80 basis points for growth option members. Further, with investors enduring a volatile market environment, the consideration of franking credits supplies a relatively reliable return stream. Ms Williams said while focusing on after-tax performance is now mandatory for superannuation investors, after-tax investing is not standard practice amongst fund managers. The fund managers who have elected to participate in the survey should be applauded for their efforts to promote after-tax measurement and management as a valuable part of the investment process.
“The survey results demonstrate there is value for funds – and their members – by using after-tax strategies within their Australian equities portfolio. Focusing on the end goals that matter to members – after tax returns – portfolios can be holistically designed, constructed and managed to take into account the impact of tax. Ultimately it’s the members of super funds who are going to reap the rewards via larger super fund balances.” she said.
Highlights from the survey include:
- Large cap managers generated additional alpha from franking of 27-53 basis points over the full year (on average)
- Franking added 1.1% to superannuation accumulation and 2.2% for pension returns (on average)
- Russell Investments RDV ETF ranked first for the income category and its After-Tax Australian Shares
- In some instances, active managers appeared to be underperforming the market based on pre-tax measures but in fact returned or beat the market.