Fund managers dragging their feet on investing for post-tax performance may find the primary excuses for ignoring the tax bill and consequently the investors’ forfeited returns are coming undone. One thing underpins this unravelling – it’s called technology. CATHERINE JAMES looks at the advancements driving the after-tax debate to its inevitable conclusion.
It’s been said a hundred times before that time and tide waits for no man. Technology should be added to the list. Tania Castro, Investment Technology Group (ITG) market data analytics product manager, says the increasing efficiency of data automation will eventually render the after-tax question as passe as the question of daily or after-fees reporting.
Years ago, Castro says, people were only reporting quarterly or monthly returns, and calculations were such a huge task that more frequent reporting was resisted, but technological advances ensured frequent and after-fees reporting ultimately had to be embraced, or else players risked being left behind.
Managing a portfolio with tax implications in mind will follow a similar trajectory. Constantly relegated to the too-hard basket, reporting after-tax returns is being facilitated with increasingly sophisticated software and systems. Once reporting after-tax returns becomes more common and as investors take stock of it, the natural evolution will be for fund managers to manage with the tax implications in mind.
But any question about managing a portfolio on an after-tax basis is closely followed by the question of how to know whether the manager is truly being tax effective, or just saying so. Enter ITG. The investment technology group has developed software that calculates a customised after-tax benchmark for each manager. ITG is also at the forefront of systems being developed to aid fund managers with an after-tax portfolio. But firstly, the benchmark. Why must each manager have an individual index?
Richard Friend, head of portfolio management at Warrakirri Asset Management – where benchmarks have been running for each of it’s 22 underlying managers for the past year – says it largely comes down to cash flow. Different cash flows in two managers investing exactly the same way will result in a different after-tax return.
“Where we’re coming from as an investor, if we’re measuring our managers on a post-tax basis then we have to make the game fair. That’s why you need individual benchmarks,” he says. “We’ve been running [after-tax benchmarks] for one year, and the largest difference between two managers on the same benchmark was 55 basis points. So if you’re measuring someone’s performance they’re not going to be too happy if you’ve got an error of 55 bps, especially if it’s a manager who’s on a performance fee deal – that can directly affect their remuneration.”