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After-tax returns prove a more effective investment indicator

Wed, 18 Sep 2013 21:35:06 +0000

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.

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BT Wrap launches market leading tax and trading tools

Mon, 04 Jul 2011 01:50:36 +0000

BT Wrap launches market leading tax and trading tools

The changes include powerful new tax tools that could mean a better after-tax investment return for clients on particular transactions and new trading enhancements that reduce the time spent on portfolio management, client reviews and rebalances.

Head of BT Wrap, Chris Freeman, said the changes were part of an ongoing drive to increase the efficiency for advisers and deliver even better value to BT Wrap investors.

“These features are game changing. Not only will they make it easier for advisers to trade equities and managed funds, but they’ll also enable them to proactively manage tax outcomes of certain sales when trading. These enhancements have the potential to directly improve clients’ after-tax investment returns and in challenging markets like these, we all know that’s becoming increasingly important.”

BT Wrap will now offer “Minimum Gain” (Min Gain) as the new default sale allocation method for investment and accumulation accounts, meaning the parcel that will be sold first is the one that results in the lowest estimated taxable gain.
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In addition, BT Wrap will provide access to additional information on the trading screen. Advisers will now benefit from access to the estimated taxable gain or loss of the proposed trade to help make smart trading decisions and they’ll be prompted with warnings if a proposed trade may lose specific tax concessions. New daily financial year-to-date reporting for estimated realised and estimated unrealised capital gains will also be introduced to facilitate more meaningful dialogue between advisers and accountants to better manage clients’ CGT outcomes.
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Mr Freeman said early feedback from advisers has been overwhelmingly positive.
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“We have been working closely with advisers on these changes and the feedback we have already had is that this will dramatically improve advisers’ ability to offer better service to clients, and to do so more efficiently,” Mr Freeman said.

Details of the changes

New default sale allocation method. The new default sale allocation method for investment and accumulation accounts is Min Gain. This increases the potential for clients to obtain a better after-tax investment return on particular transactions. It replaces the traditional ‘First In First Out’ (FIFO) method. Min Gain automatically sells the parcel that results in the lowest estimated taxable gain. For pension accounts the default sale allocation method is ‘Maximum Gain’ (Max Gain) – seeking a tax result which is generally appropriate for that environment. The appropriate default sale allocation method depends on a client’s particular circumstances – advisers can change from the default allocation to ensure the appropriate method is selected.
Automatic calculations display the estimated taxable gain or loss for each sell order on the trading screen– giving advisers better tax insight to help make the right trading decisions.
Automatic warnings at the point of trade where the trade could trigger the loss of specific tax concessions. A sophisticated warning system will alert advisers to the potential loss.
Financial year-to-date Capital Gains Tax reporting on both estimated realised and estimated unrealised gains or losses. The reporting will display the sale (or simulated sale) as it applies to each tax parcel allocated to the sale and, for each tax parcel sold, will provide a separate CGT calculation. In addition, the report will help advisers manage their clients’ tax more effectively on a daily basis, without waiting for the end of the financial year.
Single-trading screen. Advisers can now place up to 50 listed security and managed fund trades on a single screen. The single-screen trading feature – which brings market and company information, tax simulations, up-to-date cash balances and the trading engine together – makes the process simpler and trading smarter. Previously buy and sell trading was performed across up to five screens.

Click to download a copy of the enhanced-trading-quick-reference-guide and tax-quick-reference-guide from BT.

BT Portfolio Services Ltd ABN 73 095 055 208 AFSL 233 715 (BTPS) operates Wrap and administers SuperWrap. BT Funds Management Limited ABN 63 002 916 458 AFSL 233724 is the trustee and issuer of SuperWrap. A Product Disclosure Statement (PDS) or other disclosure document is available for Wrap and SuperWrap (the Wrap Products) and can be obtained by contacting BT. Investors should obtain and consider the relevant PDS or other disclosure document before deciding whether to acquire, or continue to hold or dispose of the Wrap Products. The information in this document is not tax advice and does not take into account any investor’s personal objectives, financial situation or needs. Investors should consider its appropriateness having regard to these factors before acting on it. Taxation considerations are based on current laws and their interpretation as at the date of this document. All tax information described in this document and provided via the Wrap Products are estimates only. Investors should confirm whether these estimates are correct based on their actual situation and tax position as confirmed by a professional tax or financial adviser.

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ING to sell Australian investment management unit to UBS

Thu, 30 Jun 2011 13:08:24 +0000

ING announced today that it has reached an agreement to sell its Australian investment management business to UBS.

ING Investment Management Australia’s business provides a number of investment strategies and products directly to the Australian institutional and wholesale markets.

The business had EUR 24.8 billion (AUD 34.0 billion) in assets under management as of 31 March 2011, the majority of which is managed on behalf of ANZ’s wealth management business, OnePath.

In a letter announcing the sale, CEO Steven Billiet writes “the transaction supports ING‘s objective to actively manage its capital and portfolio of businesses to ensure an attractive and coherent combination for the announced potential IPOs of its insurance and investment management activities.

“ING has previously said it plans to divest its insurance and investment management operations by the end of 2013 through a base case of two IPOs: a European-led IPO including the European and Asian insurance and investment management businesses, and a U.S.-focussed IPO.

“With a strong presence in Europe, the Americas, and nine Asian countries, ING Investment Management remains well-positioned in relation to the attractive Australian market.
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“We continue to manage an array of off-shore strategies in our various international investment centres, which are available to our clients domestically, regionally, and globally.
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“The transaction is subject to regulatory approval by the Dutch government and is expected to close in the fourth quarter of 2011. ING IM will be working with UBS Global Asset Management to ensure a smooth transition for all clients, but there will be no changes to client relationships or the way funds are managed in the short-term.
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“We understand that you will likely have questions or need additional information and we remain committed to keeping you updated on developments. In the meantime, our focus remains on delivering superior investment returns and servicing the needs of our clients.”

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Strategy Monthly: Euro confusion

Fri, 06 May 2011 04:48:00 +0000

Equities appear to have recovered their poise after the four-week correction from mid February to the lows around the time of the terrible events in Japan mid March. Markets have taken the ECB raising interest rates in their stride, perhaps because expectations for rate hikes in the UK and US have been pushed further out into the future. One consequence of those moves has been to make the euro a strong currency in recent weeks.

First-quarter earnings have given more evidence of the rude health of corporations around the world ― profit margins are high, reported earnings are high and balance sheets strong.

Equities and credit remain attractive against government bonds and cash. Gold remains more attractive against cash than at any time in its history. Gold costs money to store and secure but cash basically yields zero (3-month US Treasury bills yield 0.025% to be precise). We have never had interest rates this low (data goes back to 1694 in the UK) so gold is as attractive as it has ever been on a relative basis.

Given this backdrop, it is justifiable for ‘risk assets’ to have performed reasonably well. That suits our core positioning. However, we remain concerned that there are too many structural hangovers from the Great Recession to make unalloyed bullishness the appropriate strategy.

One of those hangovers is the unresolved matter of dealing with the debt of Greece, Portugal, Ireland and potentially others in the eurozone periphery. Portugal has now agreed a €78bn three-year financial bailout involving the EU and the IMF.

Currency traders are looking through these issues and declaring that the ECB moving its refinancing rate to 1.25% is enough to make the euro the ‘bees-knees’ when it comes to global currencies.

In the short-term, we have some sympathy with the notion of looking through the periphery problems. That is exactly what policymakers in Europe want. We need to remind ourselves that there is a plan for dealing with the situation. That plan is simple.

The EU is trying to buy time to allow its banks to be in healthier shape before asking them to deal with the implications of a debt restructuring in Greece or any other periphery country. Hence, the ECB feels it can raise interest rates because it can focus on its inflation mandate and let the politicians deal with the periphery.

The context for that view is completely consistent with the longer-term thematic backdrop that must always be borne in mind when thinking about the EU and the single-currency. That is, to paraphrase Dr Friedman, the euro is always and everywhere a political phenomenon.

On the face of it, therefore, the threat to the euro comes if there is a loss of political will to support it. There is no indication that the ruling class has lost that commitment. Indeed, the setting up of the EFSF and ultimately the ESM are indications that the commitment remains wide and deep.

However, there is a lot of concern that the electorate in northern Europe in particular will do a Roberto Duran and declare “no mas”.

We completely agree that a political backlash in northern Europe is a critical risk for the euro. Political instability would undermine the single currency and, rather annoyingly for those ruling classes, the electorate get to vote now and again.

The Finnish election on April 17 was one such annoyance. It was an unusual Finnish election because it made the front pages of newspapers across the world. The rise of the populist True Finns party (which opposes EU bailouts) to a third place finish, stoked concerns that the northern European populace are indeed now revolting against the bailouts of the south.

The leader of the True Finns put it rather more colourfully: “The Finnish cow should be milked in Finland and the milk shouldn’t be sent abroad in charity.” Timo Soini deserves to be recognised for his wisdom.

However, in the remainder of 2011 there are few opportunities for European electorates to voice their concerns. There is a Portuguese election in June but nothing significant in northern Europe. We take the growing populist opposition to the bailouts in the euro area very seriously. However we suspect that its impact in 2011 will be limited.

But surely Greece has to restructure its debts given its 2-year government bond trades at a yield of 23%? At some point yes, and there are risks in the next month or so that events will push the story back onto the front page. On May 15, the Greek government presents its budget. In June, the IMF will report on the progress Greece has made since the original bailout.

We suspect there are three possibilities for ultimately resolving the problem. We see the probabilities of each to be rather different today than they may be in two or three years time.

More assistance from the EU/IMF to avoid any restructuring. This is the most likely outcome in the near-term. There is no indication that the French or German ruling political class have any interest in jeopardising the euro project by forcing any debt restructuring on a member state until the broader financial sector, including French and German banks, are in better shape to deal with it. Probability of happening this year: 60%. Probability of still being a tenable policy in 2013: 5%.
Debt maturity is extended but no haircuts on principal. By not haircutting, financial institutions do not have to recognise any capital losses on their Greek debt. The question is whether this can be done without the market immediately thinking that it is just a stepping-stone to option three below. Probability of happening this year: 30%. Probability of being a tenable policy in 2013: 15%.
Debt restructuring with haircuts for creditors. It would most likely be a soft version, along the lines of the Brady bonds issued in the 1980s to end the Latin American debt crisis. They involve some recognition of losses but give creditors a higher-grade bond to hold in place of the restructured original debt. This will likely be done on a voluntary basis by EU financial institutions. Probability of happening 10% this year; 80% by the end of 2013.

The critical thing to think about though is that the endgame for Greece will likely be some form of debt restructuring. It will involve losses for a lot of financial institutions in Europe. When this happens, it will almost certainly lead to renewed fears of contagion to the other ‘PIIGS” too. It is only a matter of time before this dominates the front pages again. Whether the euro will be quite such a strong currency when it is happening remains to be seen. But one suspects not. Has selling the euro become a plausible hedge against a core pro-risk portfolio?

Our asset allocation is overweight equities and fixed income; underweight property and cash.

This communication is directed only at investment professionals, and should not be distributed to, or relied upon by private investors. This document is not intended for retail distribution. AEGON Asset Management UK plc is authorised and regulated by the Financial Services Authority. The information in this report is based on our understanding of the current and historical positions of the markets. The views expressed should not be interpreted as recommendations or advice. Past performance is not a guide to future performance. The value of investments may fall as well as rise and is not guaranteed.

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