Russell Investments plans to rank managers quarterly on their after-tax performance, with the results informing the consultant’s manager-selection decision-making processes.
Raewyn Williams, Russell’s director of after-tax investment strategies, says the consultant has launched an after-tax benchmarking survey, which it sent out to more than 110 Australian equity managers this week.
The survey aims to provide an independent benchmark to measure and compare investment outcomes on both a pre- and after-tax basis, says Williams.
The push to better understand after-tax performance was given impetus by the Stronger Super reforms, which require fiduciaries at super funds to consider the tax implications for beneficiaries when they make investment decisions.
Williams explains that the initial survey will rank all strategies based on after-tax returns for the financial year ended June 30, 2012.
The survey will look at the impact of off-market share buy-backs and franking credits, but will not attempt to measure the impact of capital gains tax on investment performance.
“Our aim is to help fund managers give their superannuation investors a more complete picture of what their investment performance looks like and how well the managers are serving them. Adding the tax piece is a crucial step forward.”
“It’s encouraging to see the industry pay greater attention to after-tax measurement but it’s obvious more can be done and we believe this survey will help close the reporting gap in this increasingly important field,” says Williams.
Russell analysis reveals that the impact of franking credits can represent as much as 1.4 per cent of a large-cap Australian-equities benchmark-return annually.
This could be as much as 70 basis points in additional returns for an Australian-equity super investor, says Williams.
For super funds in the pension phase, where there is zero tax, franking credits can represent the full 140 basis points a year in addition to returns or yield for pension fund investors.
Williams says that when Russell’s analysis is extended to also include active Australian equity strategies, above-benchmark franking returns can be worth an additional 50 basis points or more if off-market share buy-backs are also on offer.
In total this can represent more than 2 per cent in potential returns annually for a typical large-cap Australian-equities strategy, says Williams.
Managers have until Friday July 6 to express their interest in participating in the survey.
