As Russell said when revealing the test results for the emulation service, a master manager service can be provided by different types of institutions, not just a multi-manager like itself, including investment banks, index managers and custodians.

So far, NAB Custodian Services has been making the running following a client roadshow last October. NAB is offering three services: emulation, master manager and ‘propagation’, with most savings accruing from a combination of master manager and propagation.

Propagation is a term used by systems provider DST International for a module in its HiPortfolio funds management system. The module allows trades in one portfolio to be automatically put into other portfolios. This has a variety of uses, one of which is to minimise capital gains tax (CGT).

Traditionally, CGT has been calculated at the portfolio level, even though the tax is applicable at the fund level as the legal entity which owns the shares. If the custodian ‘propagates’ all the portfolios, it significantly widens the choice of tax parcels or lots to be matched for greatest tax efficiency.

Propagation of portfolios has been available through Hi-Portfolio for about 14 years, originally developed for Perpetual Trustees for more efficient management of multiple funds across different asset classes. It has also been used by insurance companies whose funds are subject to different regulatory requirements.

NAB quotes figures from specialist agency broker and trading technology firm Investment Technology Group (ITG) for the cost savings from the master manager service (see separate report), based on trading data from 47 funds managers. Trading cost savings, including market impact, were estimated by ITG at 66bps. With tax savings and the re-investment of the freed-up cash, total savings can be more than 100bps, according to Patrick Liddy, director of marketing and strategy for NAB Custody.

NAB has been talking to a range of funds managers, on behalf of its client super funds, and is hopeful of trialling its first full master manager service for either one or two big funds from this quarter.

While it is difficult to point to any theoretical flaws in the argument for using a master manager, the most commonly asked question is whether disclocating the relationship between manager and broker will adversely impact performance longer term. NAB’s Liddy says that of the managers he has spoken to so far, 90 per cent said they would participate in a master manager program if the clients so directed.

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