VicSuper and Australian Ethical Superannuation (AES) have both implemented a new FTSE after-tax benchmark for their Australian equity portfolios, which collectively amount to more than $2.4 billion of assets under management.

The move signals a greater push among super funds to report after tax to investors, with a focus on the return after tax and after fees.

QANTAS Super last year announced it had implemented a new structure to manage its Australian and global equities, including after-tax benchmarking.

Many of the performance numbers quoted in the industry are gross (pre-tax and pre-fees) says Oscar Fabian, chief investment officer of VicSuper, which has an Australian equities portfolio of approximately $2 billion.

“But in terms of the actual return that the investor gets, the important thing is netting off the tax and the fees,” he says.

“That’s always been known, but it’s been quite a slow take up, [for] after-tax performance, and the reason is that in terms of the headline numbers, the gross numbers tend to be higher than the net numbers for obvious reasons.”

Fabian notes reluctance in the industry to quote lower figures, saying people may not understand their meaning.

David Macri, chief investment officer at AES, whose Australian equity assets under management sit at around $410 million, agrees that industry is not comparing appropriate returns to appropriate benchmarks.

“I think it’s a good innovation by FTSE, and I think the industry will all eventually lead to after-tax, because essentially that’s what goes into our unit-holders’ pockets.”

Macri says AES would ideally like all of its benchmarks to be after tax.

With increased attention from the Australian Prudential Regulation Authority, and on the back of Cooper Review recommendations, Fabian believes more managers will be comparing performance to this after-tax benchmark.
“It’ll come, it’ll come slowly,” he says, adding that quoting return numbers without adjustment for risk is another issue super funds face.

“[Even] though we’ve all talked about it for decades, the need for risk-adjusted return, not just the returns side of it, all the league tables and everything else are just returns. So people who are top of the pops, first quartile, in terms of return, may be taking commensurately very big risks or bets in order to get those returns.”

Tax-effective investment
The FTSE after-tax benchmark uses the franking-credit tranches of the FTSE ASFA Australia Index Series.Fabian says industry is looking to more tax-aware investing in order to take advantage of unique Australian tax arrangements, including franking credits.

“We have a market where a lot of investors in Australian equities don’t value these franking credits because they’re offshore investors, and it doesn’t help them. You’ve got to be an Australian-based taxpayer to take advantage of this. So around 40 per cent of the investors in the Australian market are overseas investors, so they don’t value these credits,” he says. “So there is an opportunity to harvest and to exploit, if you like, these franking credits for Australian institutions.”

There are also opportunities to get better alpha, according to Fabian, by being methodical, systematic and inclusive in terms of the way you manage equities and tax, and harvesting this so-called alpha from franking credits.

“It can make quite a difference in terms of the impact, the potential return. It can be up to about 1 per cent difference – over a period, it’s not every month or every quarter. But over, say, a 10-year period, it can make up 1 per cent difference. So that’s 1 per cent extra return that’s available.”

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