According to new research by Parametric, when it comes to managing the tax impact of investing, tax-managed centralised portfolio management (CPM) was found to deliver better results.
The research used the real-life trading histories of 16 super fund equity portfolios to quantify the value-add of tax-managed CPM compared to a custodian solution, or propagation.
Parametric director of research and after-tax solutions Raewyn Williams said: “The results show a significant basis-points-return increase each year from tax-managed CPM versus propagation.
“The structure of tax-managed CPM gives you innate propagation as well, something that is not yet widely appreciated. So any benefit that a fund would expect from using its custodian’s propagation service is also delivered naturally by a CPM portfolio,” she said.
The research found that tax-managed CPM delivered an average basis point return of 50-90 per year compared to 5-6 basis points from propagation.
Ms Williams indicated that there are legitimate reasons why funds opt for propagation solutions, but argued that CPM options should be explored.
“Good custodians and good tax-managed CPM managers should be all too willing to help a fund measure and compare the benefits of their recommended approach using fund-specific data and realistic assumptions.”
The research said that there is concern that funds lack critical information when choosing between the two options, particularly in terms of the relative value-add of each.
“This decision is too important to make based on something generic or overly optimistic.
“Any steps a superannuation fund takes towards managing the tax consequences of its investment activities is a welcome step forward and away from the tax-naive traditions of the past,” Ms Williams said.
