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Industry Funds Management (IFM) has built an internal system to automatically evaluate the tax implications of its investment decisions – before trades are executed – across its active and passive Australian equities funds. Dubbed ATLAS, the after-tax listed Australian securities system draws on a database of trading data already stored by IFM to identify the impacts that trades will have on the franking credits and capital gains tax (CGT) liabilities tied to shareholdings. “We can analyse, pre-trade, the full after-tax consequences of a transaction,” Aidan Puddy, executive director – listed equities at IFM, said.
For example, if the manager was considering selling-down a shareholding in one of its portfolios, ATLAS would identify whether this transaction would destroy the franking credits attached to the shares by violating the 45 day rule, or incur a capital gains tax liability of 15 per cent because the stock had been held for a super client for less than 365 days, rather than the 10 per cent rate attached to shares owned for more than a year. But in delaying share sales to realise these tax benefits, the manager is exposed to pricing risk as the market keeps trading the securities concerned. “It becomes an investment decision, where we look at how many franking credits will be destroyed versus the expected future price of the stock,” Puddy said.
“We can ask: can we take the pricing risk for two days and get the franking credits, or not take the risk and destroy them?” IFM runs a suite of index funds covering the Australian market and a high conviction product that views the success of companies’ reinvestment in their operations and people as the determining valuation factor. The manager will soon receive a $3 billion mandate from one of its clients, the $28 billion AustralianSuper, to manage passively.
The mandate will account for roughly half of the fund’s Australian equities portfolio and follows the termination of about 20 mandates with active domestic equities managers, a move aimed at reducing duplication of trading positions in the portfolio. The mandate will take IFM’s listed equities business to about $4.7 billion in funds under management, most of which is held in its indexing business. In addition to ATLAS, the manager also offers customised after-tax benchmarking and full reporting at a slightly higher cost.
