Super funds can benefit with the adoption Responsible Investing goals with an after-tax investment focus: Parametric Research

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Raewyn Williams

Raewyn Williams

Superannuation funds should implement responsible investing in a tax-managed way according to a new research paper by the global implementation specialist manager Parametric. The paper presents a hypothetical tax-managed Responsible Investing portfolio that adds a quarter of a percent in after-tax returns each year over a non-tax-managed version.

Raewyn Williams, Head of Research (Australia) and Analyst Josh McKenzie at Parametric, in their Research paper ‘Tax-managing a Responsible Investing Portfolio’, successfully map out the principles for a companionable co-existence of Responsible Investing goals and an after-tax investment focus for Australian superannuation funds.The paper aims to chart a course for superannuation funds to comfortably pursue the goals of both Responsible Investing and after-tax investing.

They note with a sensible framework akin to the way ‘responsible’ companies think about tax, we easily reconcile the principles of ‘good tax citizenship’ and ‘after-tax investing’ for a responsible (and taxable) superannuation fund investor. Further, using an exemplar portfolio of global equities constructed by specialist ESG manager, Calvert, we show how a superannuation fund could implement this portfolio in an after-tax focused way, with relatively little impact on the fund’s risks. We quantify a 25-60 basis points (bps) annual benefit to funds who implement our exemplar Responsible Investing portfolio with an explicit after-tax return focus.

We have successfully mapped out the principles for a companionable co-existence of Responsible Investing goals and an after-tax investment focus for Australian superannuation funds. The ideas behind tax-managed Responsible Investing, far from being ‘uncomfortable bedfellows’, sit squarely within the regulatory framework of superannuation funds and the eminently responsible idea of funds diligently managing their array of stakeholders, including fund members and the Tax Office.

The principles embody our description of a tax equilibrium superannuation funds must strike between their ‘responsible’ tax citizenship obligations and the very real stake fund members have in funds managing the tax implications of their investment decisions well. The opportunity is for superannuation funds to bring a neat, holistic coherence to their own two-sided (tax) stakeholder management as funds holds companies to account around the same principles.

Our exemplar Calvert portfolio of global equities shows why Responsible Investing is a step away from passive index-tracking and requires some appetite for active risk. Our analysis suggests, on average, this risk is rewarded in terms of investment performance, although the year-on-year journey can be bumpy.

The other reward for this active risk is for a superannuation fund to know that its portfolio is genuinely constructed around Responsible Investing principles that are shaping society and are strong convictions of a growing cohort of fund members.

For a superannuation fund prepared to take on active risk to implement Responsible Investing, it seems an easy and useful extension to add a much smaller risk budget to pursue Responsible Investing in a tax-managed way, with results that are smoother, measurable and more immediately harvestable.

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