HESTA has joined forces with Warakirri Asset Management to develop a system to measure and remunerate fund managers on their after-tax investment returns.

The health and community services sector industry fund has asked all 16 of its fund managers to adopt the new methodology.

Half began on 1 July with the rest expected to phase in the system in preparation for a July 2010 changeover.

"HESTA will help fund managers develop their after-tax investment capability by calculating benchmarks and returns for each individual fund manager and providing feedback," HESTA executive manager of investments and governance Rob Fowler said.

"We are working with innovative fund managers who are willing to do things the right way instead of the easy way. They will be assessed on their after-tax performance."

Fowler said the move would encourage fund managers to adopt lower turnover strategies, appropriately value franking credits and more actively participate in share buybacks.

He said it would also add many millions of dollar to the value of HESTA's Australian shares portfolio every year.

"We believe this approach has the potential to change not only the work of portfolio managers and dealers, but also of analysts who will need to ensure they include the value of franking credits in their company valuations," he said.

Fund managers were traditionally measured on pre-tax returns, leading them to not value franking credits attached to dividends and to ignore timing decisions that would protect discounted capital gains, HESTA said.