Managers wanting a piece of Russell Investment Management’s $3.5 billion core Australian equities multimanager fund will have to swallow their pride and surrender at least some of the trade execution, as the multimanager plans to expand its ’emulation’ program within the fund after encouraging early results.

Visiting Australia last week, Russell’s Asia-Pacific chief investment officer Christophe Caspar said the emulation program – where Russell’s implementation services team under John Moore receives a fortnightly list of its seven core managers’ trades, nets them off and then itself implements an agreed proportion of each manager’s mandate – was being expanded with all new cashflow into the Australian equities fund.

Currently 20 per cent of the Australian equities core product is implemented by Russell, however Caspar said that may eventually become the majority, although Russell would never trade the entire portfolio itself.

"We’re finding that not all managers add as much value with execution as they might think they do," Caspar said, pointing to outperformance by the emulation portfolio of the reference ‘target’ portfolios, even before tax benefits were calculated.

Russell’s Australian CIO, Symon Parrish, said that since its June 2007 inception until November 2008, the emulation portion of the core Aussie equities portfolio had 34 per cent less turnover than the manager-traded ‘target’ portfolio, 45 per cent less brokerage costs and 75 per cent less custody fees.

Extrapolating some research by Don Hamson of Plato Investment Management on the tax impacts of  turnover, Parrish said the emulation portfolio was saving super fund investors 20bps a year compared to the target portfolio, and for individuals on the highest marginal income tax rate the saving was 80bps.

However the benefits of emulation for international equity portfolios were less pronounced, because of the lower overlap of stocks across different manager portfolios, Parrish said.

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