Foreign exchange is typically the largest asset-owner activity and a major cost to boot. Yet oddly, FX costs remain largely unquantified and unmonitored by Aussie superannuation funds.
Asset managers are not quantifying their FX costs either, which raises the question of how they are conforming to their ‘best execution’ obligations.
This is the view of Brett Elvish, managing director of Financial Viewpoint, who told delegates at the Investment Magazine Investment Operations Conference that the interests of asset owners and asset managers are not always aligned and execution convenience might be at the expense of best execution.
The session focused on efficiency leakage and why it was not a priority of funds. As Elvish pointed out to delegates, the leakage issue is the elephant in the room.
He conceded that monitoring FX trades was difficult because of the thousands of prices to watch every second but pointed out that custodian contracts were often silent on FX spreads, providing the custodian with a blank cheque without full margin transparency.
Ultimately, he told the audience that transparency would inevitably result in falling costs and argued that funds should allocate more resources to implementation.
A second area of spillage relates to the excessive capital gains tax super funds are paying, says Kyle Ringrose, principal of Athena IOC.
In Ringrose’s view, a superannuation fund’s single biggest potential savings was through slashing CGT.
Funds are liable to pay the tax for any profit crystallised on buying and selling fund assets. But the tax treatment depends on whether an account is in accumulation phase or pension phase. During the accumulation phase, super funds typically pay an effective rate of 10 per cent. But by deferring payment until members are in the pension phase, Ringrose explained, the fund would pay no CGT regardless of how long the asset had been owned and benefits passed to members.
So, in essence, a super fund is uniquely placed to choose whether it pays the tax office 10 per cent when crystallising tax charges during the accumulation phase or getting off scot free when a member retires.
“This is not given the priority it should by trustees, who have a fiduciary responsibility to ensure funds act in the interests of the members,” Ringrose said.
Ringrose admittedly could not quantity these savings; all he would say was that super funds could be paying less tax.
He also pointed out that self-managed super fund trustees were fully aware of the rules and SMSF members were more likely to see the full effects of CGT by buying and selling property or shares.