After-tax and after-fees reporting of returns to super funds by their managers seems like a logical advancement. That is, after all, what the super fund members eat. However, for many years when returns continued in the doubledigits, reporting, measurement and benchmarking on an after-tax basis just seemed to be too hard. The hidden assumption, too, was that the amounts which might be saved by placing greater focus on after-tax at the manager level probably were not all that great. With a couple of years of negative returns and the prospect of recovery looking like a long and windy road, people are now paying more attention. And that assumption about the potential savings is not correct – they can be very significant.
Warakirri Asset Management, the multi-management firm started by John Nolan as a way to better service some clients after he had founded what is now JANA Investment Advisers, has notched up three years of returns with a focus on after-tax outcomes, which required the development of bespoke benchmarks for managers. The results are compelling, not the least reason being that the focus has changed funds manager behaviour. The evidence is clear that super fund members are much better off for the move. The final report into superannuation by Jeremy Cooper this year picked up on the importance of after-tax reporting. The report recommended amendments to the SIS Act to ensure trustees consider the taxation consequences of their investment management mandates. “The relatively low tax rate on superannuation generally appears to cause trustees and managers to believe that the potential leakage from lack of careful tax management is minimal, but in a large super fund, even a few basis points can mean millions of dollars,” the report says. “The Panel has concluded that super fund tax issues are not being given adequate priority by the industry…
Trustees should have express regard for taxation issues at all stages of the investment process: strategy, implementation and monitoring… Managers should manage portfolios in a tax-aware manner for the benefit of investors.” “Jeremy Cooper got it,” John Nolan says. But pre-tax and pre-fee reporting has been the standard for the major asset consultants since the 1980s when Russell Investments and the former Towers Perrin pioneered the institutional investment advice segment of the market. “Asset consultants haven’t led the industry on this,” Nolan says. “And I include myself in that. However, I’ve known since the mid-1990s that it should be done.” Nolan also notes that “We (Warakirri) participated in buybacks and made a lot of money for investors.” Off-market share buybacks typically include a fully franked dividend component, so thinking about the after-tax consequences of such buybacks is important in determining whether investors should participate. Russell Consulting now has a director of after-tax investment strategies, Raewyn Williams.
