Small boutiques and growth-at-a-reasonable-price Australian equity managers have achieved the biggest reductions in realised short-term capital gains since the ‘12 month rule’ came into effect in September 1999, a study by the Australian School Of Business (UNSW) has discovered.

The study, ‘Do Active Fund Managers Care About Capital Gains Tax Efficiency?’ by UNSW associate professor of finance David Gallagher and colleagues, also found that managers biased to large-cap stocks and lower-volatility shares tended to realise fewer short-term gains, although managers generally have boosted their rates of year-plus holding periods by 6 per cent in the nine years since the tax code change.

The ‘12 month rule’ involves a reduction in the rate of capital gains tax on stocks held longer than a year, such that for a super fund the CGT rate falls from 15 per cent to 10 per cent. Gallagher said there were reasons to expect boutique funds may be better able to pay attention to tax issues. “They are specialised in nature, have higher incentives to deliver performance and attract new funds given the managers typically also own equity in the business, and are likely to have more timing discretion because they are typically smaller funds incurring less price impact costs than large funds.”

At an event organised by Alleron Investment Management discussing Gallagher’s research last month, Mercer consulting principal Andrew Harrex said client pressure would soon make it standard practice for managers to offer funds for different tax-paying classes of client, with ‘super’ and ‘non-super’ the most obvious distinction.

He said standard reporting would also throw the spotlight on levels of tax-deferral, with managers asked to set out instances where franking credits were lost under the ‘45 day rule’, CGT discounts foregone under the 12 month rule, a commentary on loss harvesting activities and justification for entering or ignoring share buybacks.

Gallagher noted that Australian funds managers already showed a preference for companies which paid dividends with high levels of franking, “rather than just looking at the dividends themselves”. Alleron chief executive, Barry Littler, said super funds which placed more emphasis on after-tax returns risked losing the performance benefits which some funds managers were able to add through higher turn-over, and he questioned whether those tax rules which penalised turn-over might reduce the efficiency of the industry overall.

Speaking to that point at the event, ipac chief investment officer Jeff Rogers said that while the traditional funds management inventory system of FIFO (first in, first out) boosted levels of short-term realised gains, it had other benefits around “intergenerational fairness” between unitholders.

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