Kwa says that rather than focussing on the size of a manager’s income distributions, investors need to think about its components. For example, the Schroder Wholesale Australian Equity Fund is tax effective in the sense that 99.6 per cent of its distributed gains this year were subject to a capital gains discount. With the capital gains discount, tax is only paid on 50 per cent of the realised gains of stocks that have been held for longer than 12 months. According to Schroder, the difference the capital gains discount makes between two active funds returning 12 per cent on a $100,000 investment over one year is $1395.

In addition to knowing tax parcels (the proportion of shares eligible for the capital gains discount), tax-effective managers also prefer stocks with franking credits, and where possible, they like to participate in off-market share buybacks despite the damage it may inflict on pre-tax ‘headline’ returns. Not many managers are taking these measures at the moment, according to Friend at Warakirri. “There is a misalignment of interests,” he says. “Fund managers are incentivised to deliver pre-tax returns, when investors want and get post-tax returns.”

Paul Fiani, founder of Integrity Investment Management, is keen to increase the focus on after-tax returns and also dispel the notion that index managers are naturally more tax-friendly. “We factor the franking credit value into our discounted cash flow models, it’s a fundamental measure for us” he says. “If you factor the value of franking credits in to your decisions, it gives you franking leakage which hurts your performance on the pre-tax side, but you can come out way in front on the post-tax side, particularly if you emphasise capital gains efficiency in your sell discipline as we do.”

Warakirri’s Friend says that in 2005, less than 25 per cent of funds managers had accurate data on the tax liabilities in their share parcels, information he believes every funds manager has a responsibility to know.

But not everyone is convinced. Tom Elliot, managing director at MM&E Capital, a hedge fund, describes the move towards after-tax reporting as “dumb”. Elliot warns that if post-tax reporting becomes the focus, managers could fall into the trap of concentrating on tax rather than trying to achieve the best performance. “Using tax to justify decisions is just bad investing,” he says. “If you sit there worrying about that kind of thing, in the long run you will make incorrect decisions. If you wanted to be cynical, you might even suppose that funds managers are now boasting about their tax effectiveness to divert attention away from the fact that they’ve lost 20 per cent this year.”