The Russell After-Tax Australian Shares Fund (for Superannuation Investors) uses sophisticated tax strategies with the aim of enhancing after-tax returns (net of fees) while using Russell’s proven skills in active portfolio management to provide exposure to a diversified portfolio of Australian equities.

“As recognised by the Cooper Review, tax implications can have a significant impact on investment returns. Despite this, there is a widespread lack of awareness around after-tax investing (ATI) and a dearth of products that combine active management with tax strategies,” said Raewyn Williams, Director, After-Tax investment Strategies at Russell Investments.

Russell believes ATI starts with providing visibility to after-tax outcomes – something surprisingly hard to find – but must go beyond this and integrate tax awareness into the overall investment process. Responding to this need, Russell’s fund encompasses a variety of sophisticated strategies encompassing turnover management, emulation, CGT optimisation and preservation of franking credits. “The focus of these strategies will not be on tax minimisation but, rather, on enhancing overall returns on an after-tax basis as valued by superannuation investors” Ms Williams said.

The fund is groundbreaking in that it is a distributing fund, providing pooling and scale benefits, but tailored to maximise returns for those on a 15% tax rate rather than compromising tax decisions for those on different tax rates. It will target superannuation investors, from large industry, public sector and corporate funds right through to smaller self-managed super funds (SMSFs). The fund has adopted an after-tax benchmark – the FTSE ASFA Australia 200 Superannuation Index – in recognition of the importance of this outcome for superannuation investors.

Scenario driven turnover strategies

Ms Williams said many superannuation funds are told a low turnover approach is adequate to manage tax implications, however she cautioned this is an overly simplistic approach that does not always provide the best after-tax outcome. Russell’s new fund is instead adopting a ‘turnover management’ approach where trading is more flexible. For example, in an up market, the fund will favour lower turnover by lagging trades to defer tax by not realising a capital gain. Conversely, in a down market, the fund will relax turnover guidelines if a loss can be realised by trading to offset other realised gains to reduce tax.

Proven underlying investment strategies

The fund uses Russell’s emulation strategy, structured to capture alpha-seeking insights from multiple managers, and implemented as a centrally managed portfolio. This results in turnover being about 40% lower than in a typical multi manager approach. Kathy Cave, Portfolio Manager of Russell’s very successful Tracker Fund which uses emulation and has been running since 2006 with AUM of $2bn as at 31 Dec 2010, will manage the new fund. “The Tracker approach not only reduces the base line turnover, but allows us to implement the tax strategies on a ‘parcel-by-parcel’ basis” said Kathy Cave. Initially the managers in the fund will be aligned with those in the Russell Australian Share Fund. In order to boost the franking credit benefits to investors, there will be an allocation to the Russell High Dividend Australian Shares ETF, RDV. The current gross-of-franking yield on RDV is 7.2% compared to the broader market gross yield of 5.6%.

Share buybacks will also be a focus as off market share buybacks may present lost opportunities for traditional funds which do not participate because of their pre-tax focus and/or the different tax profiles of their investor base. For example, last year’s Woolworths buyback offered after-tax returns a boost for superannuation investors but detracted for individual investors with higher tax rates. Russell’s new fund will be positioned to obtain maximum after-tax benefits by participating in share buybacks that are advantageous for superannuation investors. “We have built a highly sophisticated solution in an easily accessible package – an after-tax approach will increase a fund’s returns without compromising the underlying investment decisions,” Ms Williams concluded. “We are pleased to be able to offer this to superannuation funds to help increase their returns – which will ultimately mean a better outcome for investors.”

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