Mr  Zhang reports to Chris Briant, Head of Australia and New Zealand, Eaton Vance Management (International) Limited and Paul Bouchey, Global Head of Research, Parametric.

As Manager of Research and Strategy, Australia and New Zealand, Mr  Zhang works closely with Parametric and Eaton Vance’s overseas offices to plan and deliver internal and client-facing thought leadership, including pieces relevant to Australian super funds. He focuses on the firm’s after-tax investing, post-retirement and responsible investing capabilities. He oversees Sydney-based analyst Joshua McKenzie and is a member of Parametric’s global thought leadership team in Seattle.

Mr Zhang joined Parametric in 2015 and most recently worked with the firm’s global core platform technology team as Enterprise Data Management Architect.

Before joining Parametric, Mr Zhang was a portfolio manager at a boutique Australian equities asset manager. He previously worked in asset consulting at Russell Investments and as an analyst with the Australian Prudential Regulation Authority (APRA).

“Our Australian business has experienced significant growth in client assets under management and product breadth over the past eight years,” said Mr Briant. “In the next phase of our growth, Whitlam is critical to further developing our Australasian business. He has an intimate knowledge of the funds management industry, having consulted to superannuation funds in Australia, and has deep local subject-matter expertise. All these experiences will prove invaluable in understanding and helping our clients in his new role.”

Mr Zhang replaces Raewyn Williams, who is leaving the firm after seven years to pursue other interests. Mr Briant commented “While we are excited about Whitlam’s promotion, we are sorry to see Raewyn leave and sincerely thank her for her enormous contribution to the business over the past seven years.  We wish her all the very best for her future.”

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Raewyn Williams

Centralised Portfolio Management (CPM) can play a pivotal role in the mass consolidation of the superannuation industry that will define its future for the next 10 years, says global implementation manager Parametric Portfolio, an affiliate of Eaton Vance (NYSE: EV).

“With the APRA-regulated superannuation funds on the cusp of horizontal integration, it is vital that merging funds deliver investment solutions that better match the needs and preferences of fund members at the right cost,” says Raewyn Williams, Parametric’s Head of Research, Australia & New Zealand.

“Funds that fail to do this could find their ‘scale dividends’ will be meagre, members could face more limited, ill-fitting options that simply pass on market returns, and culture dilution and, at worst, ‘mission drift’ could substitute superannuation funds as the neo-bank conglomerates of the future.”

A CPM strategy takes the “best ideas” of each superannuation fund’s individual fund managers and manages them in a single live portfolio that removes tax and trading inefficiencies. Its application to the fund merger process is detailed in Parametric’s latest research report, From hurdler to hero: Using super fund mergers to deliver key investment wins.

Williams says using a specialist change management and implementation structure (CPM) can help navigate the challenging, high-stakes investment rationalisation process to deliver a new, cleverly designed equity portfolio. “What might have been impossible (at best, unwieldy) in a traditional equity structure can been done with surprising ease and agility using CPM.”

She says the benefits are many and varied, which include:

• Stripping out redundancy, uncompensated risk and other inefficiencies that would otherwise survive the merger;
• Being able to pivot to meet key strategic objectives; for example, to reflect lower fees, better ESG characteristics or a lower (or higher) risk appetite;
• Preserving portfolio value through the investment rationalisation process via intentional management of taxes and transaction costs;
• Implementing the investment-related deliverables of the fund merger in a timely fashion, consistent with the broader fund merger timetable; and
• Being able to target the investment-related ‘wins’ from the merger as a contribution to the merger’s broader success.

“The beneficiaries of these wins are fund members; but there is also, arguably, a more commercial win – a competitive advantage these super funds will enjoy as the merger is executed over other funds who bypass a CPM equity structure.

“In our view using CPM will allow them to move to the implementation phase of the investment rationalisation project with a detailed understanding of the expected portfolio holdings, risks, fees, tax positions, ESG and other sensitive attributes of the newly designed, rationalised portfolio.”

Williams says the bigger the potential investment changes, the more the value of a CPM structure and best-of-breed implementation come to the fore.

“We may never see more dramatic, sweeping investment portfolio changes than in the context of the fund mergers that could halve the number of APRA-regulated superannuation funds over the next decade.

“Funds must position themselves well in advance to execute well on merger activity when it happens. This becomes compelling for larger funds that expect to be a party to fund mergers over and over again.

“Funds that take the lead in this process will be excited by the opportunity their merger plans present: to tackle the investment rationalisation required with a heroism that delivers key investment wins to the newly merged entity and its members and helps to underscore the merger’s success,” says Williams.

Read the report: From hurdler to hero: Using super fund mergers to deliver key investment wins.

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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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Raewyn Williams

The Retirement Income Panel’s work over the past year should give superannuation funds all the motivation they need to decide what ‘success’ in funding pensions really means, according to a research note by the global implementation specialist manager Parametric.

Raewyn Williams, Head of Research (Australia) and Analyst Josh McKenzie, in a ResearchBite titled “Income-Targeting in a Retirement Portfolio: too much, too little or just right?”, explore how superannuation funds deliver an adequate pension to retired members is a new frontier.

“They are not shackled by legacy products, they’re not the focus of peer surveys or the APRA heatmap. It is a rich ‘greenfield’-type opportunity to get back to the specific needs and sensitivities of fund members and embrace problems not yet solved by the industry – truly, a licence to innovate.”

The authors argue that delivering an adequate pension to retired fund members requires funds to determine what an ’adequate’ yield on the Australian equities component of a retirement portfolio is and be willing to move beyond mechanical, accumulation-style approaches to yield benchmarking.

“One benchmark to determine adequacy could be a portfolio’s yield equaling or exceeding the yield of the S&P/ASX 200 Index over a certain timeframe.

“Franking credits also should be added to the equation because they provide significant value to retirees. Our research shows that franking credits on the S&P/ASX 200 are worth 1.5% annually to retirees and an active, franked dividend targeting strategy can add as much as 2% annually to retired fund members, albeit with a different risk profile.

“A pension-focused Australian equity strategy without franking visibility and ‘smarts’ misses an important portfolio lever to meet its income targets. Can a super fund really answer credibly whether the equity yield outcomes are ‘successful’ without including franking?”

Williams and McKenzie say this market-cap benchmark approach to yield will appeal to many funds. “It’s relatively simple to implement, reflects familiar performance and benchmark concepts and showcases how a super fund’s thoughtful portfolio design can beat a ‘dumb beta’ equity portfolio yield outcome.”

They add that a more ambitious challenge funds could take up is to measure yield ’success’ through the prism of the member – not the fund. “For example, think about a fund with reasonable data or, for some, a good feel about member preferences. Members who would otherwise invest their retirement savings outside super in, say, term deposits, ‘blue-chip’ Australian companies or a rental property really want to know this: whether their decision, instead, to let their super fund invest to generate retirement income has been a good one. So that could translate to benchmarking the yield on their super retirement portfolio against yields on term deposits, blue-chip stocks or rental properties.

To demonstrate the amount of innovation that is possible, Williams and McKenzie also discuss an array of benchmarks funds could use to gauge yield ‘success’ based on age pension entitlements, salary replacement targets and ASFA’s dollar-based living standards for retirees.

The authors conclude: “Our key message is that as super funds develop and implement their retirement portfolios, they can do better than simply migrate mechanical accumulation portfolio–style yield benchmarks that, in truth, may miss the mark for members.

Super funds could think innovatively and define yield success in a way that more closely reflects what retired fund members would relate to and care about. The estimated 1.8 million members moving into and through retirement in the next five years hope the opportunity to measure ‘success’ well in income-targeting retirement portfolios is one that super funds don’t miss.”

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Raewyn Williams

The possibility for government to increase superannuation taxes in response to the ballooning budget deficit caused by COVID-19 could severely hurt member balances at retirement, according to a research note by the global implementation specialist manager Parametric.

Raewyn Williams, Head of Research (Australia) and Analyst Josh McKenzie, in a short paper titled “Will retirees pay the price for superannuation tax rises?” argue that investment tax inside super may be a political “soft target” because it won’t be felt directly in most voters’ hip pockets, but it will come with an unfavorable “tit for tat” – the longer-term impact on retirement outcomes.

The authors suggest that the two most likely tax options are increasing the headline tax rate of 15% or reducing the capital gains tax concession from one-third. A third option, limiting the claiming of franking credits for Australian share dividends, is discounted as being too political risky.

Using the Productivity Commission’s asset allocation, returns, fees and other modelling assumptions in its 2018 report, they suggest a fund member can expect to retire after 46 years with an account balance of $682,146 at a 15% tax rate.

“The smallest tax increase (15% to 17.5%) causes the member to forgo (in today’s dollars) $40,509 in retirement savings. But if the tax rate is increased to 25%, then the member loses $150,448 in retirement savings, ending up with 22% less than expected outcomes under the current tax regime.

“The ‘tit for tat’ retirement impact of a super investment tax rise is clear, even if not immediately felt by the super fund member.”

Williams and McKenzie say shifting the tax dial to reduce the one-third CGT discount concession would have a much more “subdued” impact on a member’s retirement balance. This is primarily because, unlike increasing the 15% headline tax, a CGT change would only impact some assets inside super and would not erode members’ initial (taxed) contributions into super.

“A very small reduction (3%) in the CGT discount concession to 30% would shave a negligible $1,545 of the member’s retirement balance of $682,146. Even using our most aggressive assumption (the CGT discount more than halving to 15%), the expected loss to retirement savings is a modest $8,446.

“Other more muted changes to the super CGT rules are also possible, such as extending the current one-year holding period rule (for CGT discount eligibility) to three years, capping carry-forward capital losses or limiting the types of assets eligible for CGT discounting.

“Faced with a raft of possible tax changes, the industry should favour changes to the CGT rules over a blanket increase in the super fund tax rate.”

Williams and McKenzie conclude that the possibility of tax increases should send a clear message to the industry – for funds to better manage the tax impacts of their investment decisions.

“Our research on the Productivity Commission’s report showed that a genuine after-tax focus could be more valuable to retirees than reigning in fees. So, what if a super fund responded to a higher-tax environment by adopting a genuine after-tax investment management focus to defend retirement outcomes? After all, good retirement outcomes are the raison d’etre of super; a way to avoid the enormous fiscal drain from public funding of age pensions in future.

“It reminds us that super funds have more in their armoury than they might think as the debate about potential super tax increases plays out. Lobbying against tax changes that will be most harmful to members’ precious retirement savings should be part of the industry’s response. But, behind the scenes, funds should also consider the value of genuine after-tax portfolio management in a higher-tax environment to limit the price paid by future generations of retiring members.”

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Raewyn Williams

All sectors of the superannuation industry agree that successful equity investing entails some short-term pain to enjoy long-term gain.

Superannuation funds and investment managers who embrace an active management philosophy can feel this acutely when their style does not pay off in a certain stage of the market cycle or there is a regime shift to a ‘new normal’. Those with more faith in the market itself – passive investors -feel the pain of underperforming active peers in market downturns or when active theses are having their day.

Yet, all would advocate to ‘hold the line’, for superannuation investing is a long-horizon game designed to benefit members who have a whole working life to save for retirement within superannuation and, for most, decades more in retirement to enjoy the fruits of superannuation.

This long-horizon perspective should make it easy for superannuation funds to continue to evolve their equity portfolios as new, better structures become available.

And yet, there is a roadblock: in Australia, funds invest in a taxable environment and a step forward in the portfolio evolutionary chain can require a fund to write a cheque to the Tax Office. This tax bill too often cuts short or delays what should be a natural, healthy process of superannuation equity portfolio evolution.

Our concern is that, on its face, baulking at a single, upfront tax cost sits rather uncomfortably with an espoused commitment to long-horizon investing, write Raewyn Williams and Josh McKenzie, Parametric Australia, in their latest in-depth whitepaper.

They note : “The important task of evolving equity portfolios may be stymied by upfront tax costs, and suggests a framework super funds can use to solve this problem.”

Read the full paper.

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Raewyn Williams

Superannuation funds readjusting their investment portfolios need to carefully consider all the tax implications and not focus solely on timing and transaction costs, says global implementation specialist manager Parametric.

In a research paper titled “The Sting in the Transition Tail”, Parametric Managing Director of Research (Australia) Raewyn Williams and Analyst Joshua McKenzie use a modest hypothetical example of a small cash raising and transition of S&P/ASX 100 financial stocks to demonstrate that ignoring the tax consequences potentially costs the portfolio 13 bps – a leakage exceeding the transaction costs by more than six times.

Williams and McKenzie say: “Quite illogically, a traditional transition manager and underlying superannuation fund client could report that transaction costs have been contained well but remain blithely unaware of this much larger tax sting.

“As super funds are asked to constantly adjust and readjust their investment settings, the hidden cost of these tax-naïve transitions will add up and be felt in members’ pockets.

“The more super funds contemplate portfolio changes, the more they should be motivated to find a specialist platform to implement these changes to ensure that all the costs of their change program are managed well, including tax.

“A fund’s goal should be to extract as much value as possible from every new or necessary investment idea in its new target or destination portfolio, instead of seeing this value paid away to third-party brokers, traders, managers, funds and the taxman as the expensive price of getting there.”

The authors argue that although it’s business as usual for funds to regularly tailor their investment portfolios to adjust their liquidity, asset allocation, investment strategy mix and hedging and overlay settings, both the funds and their transition managers still have a blind spot around tax.

“When it’s considered that funds are liable to a 15% headline tax and can benefit from franking credits, it seems logical to assume that super funds would carefully consider the tax implications of any transaction involved in readjusting a portfolio. But this is usually not the case.”

To illustrate, they cite four examples where funds and transition managers need to be aware of the investment tax risks inherent in equity transitions:

• Selling out of cum-dividend legacy positions without considering the value of accrued franking credits not priced into equities;
• Selling out of ex-dividend legacy positions in a way that causes loss of franking credits received;
• Selling out of legacy positions before the trade qualifies for tax concessional treatment of capital gains;
• Allocating tax lots to the legacy trades which trigger higher capital gains or lower capital losses than other tax lots would have triggered.

Williams and McKenzie posit several techniques for consideration when addressing the tax risks involved in readjusting portfolios and note that these are standard considerations in a specialist implementation structure like Centralised Portfolio Management (CPM).

“Franking credits can be protected by managing the timing of ex-dividend and cum-dividend stocks; capital gains can be managed by delaying a transition of short-term holdings, intelligent tax lot selection and widening the tax lot optimisation universe. More broadly, sector and factor risk optimisation techniques can help to define the legacy and target portfolios in a transition based on risk characteristics.”

The new research also refers to an actual tax-aware equity transition conducted for a super fund client in March using Parametric’s innovative CPM model, which triggered around a quarter of the turnover and capital gains compared with a traditional approach to transition management.

The authors conclude: “Super funds may endorse the principle of tax awareness in their business-as-usual change environment, but tax-aware transition practice requires the right structure, operational processes, tax lot information and, of course, skills to balance tax thinking with the other important dimensions of transition management. Tax concerns should not drive how equity portfolio changes are implemented, but surely we can do better than just ignore tax costs completely.”

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Raewyn Williams

Australia’s recent spate of off-market share buybacks highlights the misalignment between super funds’ pre-tax investment focus and what matters to fund members – after-tax returns.

This is the view of global implementation manager Parametric in new research that graphically illustrates that funds participating in these share buybacks must ‘step backwards’ in pre-tax returns to ‘step forward’ in after-tax returns.

The authors, Australian Managing Director, Research, Raewyn Williams, and Analyst, Josh McKenzie, who looked at seven prominent buybacks on the market between 2016 and 2019, say: “The figures tell all. In pre-tax terms (before fees and transaction costs), an index-tracking fund ‘steps backwards’ by 78 basis points across all buyback stocks. But after-tax terms, it ‘steps forward’ 28 basis points. If a super fund is overweight five or 10 per cent to these buyback stocks, the pre-tax penalty is higher but the performance gain is 64 basis points and 100 basis points, respectively, after tax.

“What we are saying is that performance-wise super funds have to go backwards in pre-tax terms to go forward in after-tax terms. It is the investment version of Roald Dahl’s ‘square sweets that look round’ – it makes perfect sense when you understand it.”

The authors step through the mathematics around buyback calculations to dispel confusion about how buyback participation impacts equity portfolio performance and demonstrate the true value of buyback opportunities for super funds. “But a critical question remains – is this enough to drive the right member-centric behavior and decision-making by funds, their equity managers and asset consultants?

“Most performance reporting on Australian equity strategies for super funds focuses on pre-tax investment outcomes. So, when funds and their advisers are selecting and appraising Australian equity managers (a decision with high stakes for all involved), they are always armed with pre-tax performance histories and rarely with after-tax performance.

“The implications of this pre-tax mindset are grave given our demonstration of how funds must ‘go backward’ pre-tax to ‘go forward’ after tax. In our analysis, it becomes very difficult for funds to give up as much as 3% in pre-tax performance, notwithstanding the significant after-tax value to be generated for members in doing so.

“There is, in fact, a perverse incentive to reject opportunities that add (after-tax) value to superannuation fund members in order to preserve the pre-tax performance upon which so much decision-making is based.”

Williams and McKenzie say there are two ways in which the industry can solve this problem – a sustainable solution that eliminates the agency risk and addresses the misalignment in investment focus and a “quick fix” that requires what the authors call a “performance fudge” to specifically deal with buyback scenarios.

“If the industry could reset from the ‘ground up’, one compelling idea would be to establish after-tax performance as the baseline to reflect the taxable nature of super funds. This would align funds’ investment thinking to what actually builds retirement savings for fund members – after-tax returns. There are other motivators as well, like improving the fund’s ranking in peer surveys and beating the effective tax assumptions embedded in APRA’s new heat map.

“A less ambitious, and more common, fix is to back out the buyback impact from pre-tax performance whenever the strategy participates in a buyback. This removes the perverse incentive for an equity manager to reject a value-accretive buyback opportunity by eliminating the pre-tax buyback penalty.”

The Williams-McKenzie paper identifies problems with this quick fix and stresses that it is only a short-term solution for funds. “We need to address the issues with this approach – have funds thought about them? This quick fix has been a helpful start, and it’s great that custodians can accommodate it. But it should be just a stepping-stone to a more sustainable, long-term equity solution that genuinely transitions super funds to an after-tax performance mindset.”

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Raewyn Williams

Superannuation funds moving to a rules-based equity management approach could improve their performance by more than half a percentage point a year by genuinely focusing on after-tax, not pre-tax, returns. The savings from an after-tax focus can be generated without changing the risk profile of the equities strategy.

New research by Raewyn Williams, Managing Director, Research (Australia), and Vassilii Nemtchinov, Director of Research, Equity Strategies, at the global implementation manager Parametric, tests its after-tax investing principles on the ‘fundamental indexing’ (RAFI) approach pioneered by the US firm Research Affiliates, which has only recently become directly available to super funds in Australia.

Parametric’s research finds that the appeal of fundamental indexing can be further enhanced by adopting a tax-managed RAFI approach and estimates the potential benefit to a super fund’s global developed equity portfolio to be 53 basis points a year, before fees and transaction costs.

Say Williams and Nemtchinov: “Since listed equities represent, on average, more than half of the entire investment assets of an APRA-regulated fund, this nascent opportunity to improve returns is highly significant. Consider the value of this additional 53 basis points a year to a super fund tasked with finding new investment ideas in a climate where markets are volatile, equities look fully priced, alpha is scarce and fee budgets are frugal.”
In Williams and Nemtchinov’s joint paper, “Fundamental Indexing: Why True Tax Efficiency Beats Simply Keeping Turnover Low”, they slam a “pervading misconception” at the heart of the active-passive investment debate – that simply moving from an active to more passive equity management style makes superannuation funds tax efficient.

“This is a false premise, failing to appreciate what the opportunity set to manage taxes on an equity portfolio really covers, and instead reduces tax efficiency to a simple, misleading ‘keep turnover low’ mantra. It is not about turnover minimisation, but about having turnover that recognises the asymmetric preferences of a taxable investor (less gain turnover, more loss turnover).”

“The opportunity to give a portfolio a tax holiday is ignored in ‘keep turnover low’ passive approaches but should be integral to the design of an equity portfolio based on after-tax principles.”

Modelling the differences between a tax-agnostic and a tax-managed RAFI global equities strategy from the perspective of a taxable super fund investor, the duo find that: “Over the 21 years of our analysis, a $5 billion RAFI global equity portfolio that simply ‘keeps turnover low’ grows to $24.6 billion, while its tax-efficient peer with a similar risk profile grows to $26.8 billion – more than $2 billion more – over the same period.”

Williams and Nemtchinov suggest that funds on the move towards a lower cost, rules-based approach to obtaining equity exposure should think about two kinds of differences between simply ‘keeping turnover low’ and a genuine after-tax investment focus: lost opportunities to add to after-tax returns (quantitative concerns) and visibility issues that prevent a super fund from assessing the portfolio’s performance and value in after-tax terms (qualitative concerns).

For Williams and Nemtchinov, there are very practical consequences of these differences: “The quantitative deficiencies of orthodox passive should inform a fund’s thinking around matters like the ability to meet investment objectives, rankings in peer surveys and APRA’s recently unveiled ‘heatmap’ rating of funds, which has some effective tax assumptions embedded in it. The qualitative deficiencies reflect on fiduciary alignment and the ability to manage stakeholder expectations. Both types of concerns are relevant to the member outcomes test that funds must now pass annually as a matter of law.”

Williams and Nemtchinov’s research concludes with a challenge to super funds to seize the opportunity to embed tax management into new rules-based equity approaches they are, in increasing numbers, adopting: “Our 21-year comparison with its $2 billion–plus difference is the cost of settling for the beguiling simplicity of a ‘keep turnover low’ argument instead of applying intellectual rigour to the after-tax question. Although not a cost that usually appears on performance reports, it is felt in other ways, including in super fund peer rankings, Productivity Commission reports, APRA ratings and, ultimately, in fund members’ pockets.”

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Raewyn Williams

New research for superannuation funds by the Australian arm of global specialist implementation manager Parametric provides evidence that a program to manage two costs, tax and transaction costs, can deliver meaningful benefits to funds and their members.

The research draws on concerns amongst superannuation funds about how to meet investment objectives when markets are volatile, the yield on ’safe’ assets is at historic lows, investment alpha (market outperformance) is scarce and most forecasters are ‘bears’ not ‘bulls’.  Parametric’s view is that a good response to these challenges is to begin by ‘controlling what you can control’.

Parametric MD of Research in Australia Raewyn Williams says this is akin to our country’s wise stewardship of water in the current drought crisis.

“In drought-stricken Australia we can’t predict when it will rain again, but our sense of stewardship means we ‘control what we can control’—we limit our shower time, water our gardens at night, install water-saving devices in our homes and so on.”

“Similarly, in the face of unpredictable investment markets, funds, who are stewards of the retirement savings of Australians, have an opportunity to start with what they can control – investment taxes and transaction costs.”

Parametric’s new research suggests that in the face of these complex investment conditions, funds, by and large, have not recognised that there is an alternative to simply continuing to ‘hope for rain’ and trust that they are getting their portfolio bets right.

Williams suggests that confusion about the value of managing investment taxes and transaction costs could be a factor in these areas of implementation leakage being overlooked.  The research examines different estimates, including the Cooper Review’s lofty suggestion in 2010 that equity portfolios could benefit by as much as 200 basis points a year and the Productivity Commission’s more recent report that implied the benefits were meaningful.  The research also cites the recent findings of the UK’s Financial Conduct Authority that changes to the way trading costs are disclosed have reduced embedded research costs by 20-30% across Europe, with no ‘give up’ in the services portfolios are receiving.

“We believe a good conservative guide to the value of an after-tax equity management approach, net of all fees and costs, is around 59 basis points annually.”

“For equity trading costs, it really depends.  But for a large-cap Australian equity portfolio, every $100,000 of equity trades could realistically cost a superannuation fund as much as $2,380 or as little as $420.  We do know that few funds are getting execution-only ‘best price’ on their trades and advocate for funds to receive transaction cost reporting so they can start a discussion on this issue.”

The research paper gives superannuation funds examples of the kinds of after-tax reporting and transaction cost analyses that funds can use and highlights the key metrics useful to funds who want to bring a ‘control what you can control’ discipline to the way they invest.

Beyond the difficulties of the current investment climate, the research is particularly relevant to two hot topics of discussion amongst superannuation funds – fee levels and fund mergers.  It is illogical, says Parametric, to focus on stripping out fees when retiree fund members would benefit almost twice as much from their funds cleaning up implementation leakages.

Williams would like to see superannuation funds planning fund mergers – or other big portfolio changes – pay particular attention to the research findings.

“These controllable costs are positively correlated with portfolio changes.  The more changes your fund is planning, the more you are incentivised to put an efficient implementation platform in place before you instigate the changes.  I understand the temptation to put off new ideas until the big changes are delivered, but superannuation funds with a busy change program should consider prioritising the initiatives that will make the rest of their changes easier to implement and less costly to members.”

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