Even if the economic performance of the shares is flat, you still get a distribution because currency gains and losses are brought into the distribution. “You do get situations where investors are paying tax when there’s flat economic performance.” Williams is part of the Investment and Financial Services Association working group that is lobbying the government to change the hedging elective so that currency forwards are also brought onto capital account, ensuring they receive the same tax treatment as the equities in the underlying portfolio. “The point is to make it an after-tax hedge, so you’re hedging your exposure.” Most managers would be happy to report marginally positive numbers during a global equities slump, but Williams says it can be awkward for managers to explain these returns to clients. “It’s a credibility issue. It just looks strange. Managers have to explain to investors why they get a big distribution when performance has gone south.”

Like many DST clients, QIC has chosen to ride the default option, but would submit its currency-hedged portfolios to the currency hedge elective if derivatives are brought on capital account. The problematic tax treatment of derivatives in equity portfolios seems to be just one element of the legislation that investors would like to see finetuned. Taking a broader view, Williams agrees with the aim of TOFA, but says its implementation could be improved. “I don’t know if TOFA is an improvement. It is good to have one set of rules that is attempting to apply a lot of instruments in a dynamic industry. Whatever is developed going forward, we can come back to these principles. But there is a lot more detail to be worked on. “They are coherent principles, but how well that translates into practice is still a question mark.” At DST, David Rhind’s clients echo this view. “The feedback we see is general acceptance and muted applause. There is the recognition that TOFA is improving things but there is still a way to go.”