Super funds could boost their equity returns by 59 basis points each year by adopting a ‘control what you control’ philosophy
New research for superannuation funds by the Australian arm of global specialist implementation manager Parametric provides evidence that a program to manage two costs, tax and transaction costs, can deliver meaningful benefits to funds and their members.
The research draws on concerns amongst superannuation funds about how to meet investment objectives when markets are volatile, the yield on ’safe’ assets is at historic lows, investment alpha (market outperformance) is scarce and most forecasters are ‘bears’ not ‘bulls’. Parametric’s view is that a good response to these challenges is to begin by ‘controlling what you can control’.
Parametric MD of Research in Australia Raewyn Williams says this is akin to our country’s wise stewardship of water in the current drought crisis.
“In drought-stricken Australia we can’t predict when it will rain again, but our sense of stewardship means we ‘control what we can control’—we limit our shower time, water our gardens at night, install water-saving devices in our homes and so on.”
“Similarly, in the face of unpredictable investment markets, funds, who are stewards of the retirement savings of Australians, have an opportunity to start with what they can control – investment taxes and transaction costs.”
Parametric’s new research suggests that in the face of these complex investment conditions, funds, by and large, have not recognised that there is an alternative to simply continuing to ‘hope for rain’ and trust that they are getting their portfolio bets right.
Williams suggests that confusion about the value of managing investment taxes and transaction costs could be a factor in these areas of implementation leakage being overlooked. The research examines different estimates, including the Cooper Review’s lofty suggestion in 2010 that equity portfolios could benefit by as much as 200 basis points a year and the Productivity Commission’s more recent report that implied the benefits were meaningful. The research also cites the recent findings of the UK’s Financial Conduct Authority that changes to the way trading costs are disclosed have reduced embedded research costs by 20-30% across Europe, with no ‘give up’ in the services portfolios are receiving.
“We believe a good conservative guide to the value of an after-tax equity management approach, net of all fees and costs, is around 59 basis points annually.”
“For equity trading costs, it really depends. But for a large-cap Australian equity portfolio, every $100,000 of equity trades could realistically cost a superannuation fund as much as $2,380 or as little as $420. We do know that few funds are getting execution-only ‘best price’ on their trades and advocate for funds to receive transaction cost reporting so they can start a discussion on this issue.”
The research paper gives superannuation funds examples of the kinds of after-tax reporting and transaction cost analyses that funds can use and highlights the key metrics useful to funds who want to bring a ‘control what you can control’ discipline to the way they invest.
Beyond the difficulties of the current investment climate, the research is particularly relevant to two hot topics of discussion amongst superannuation funds – fee levels and fund mergers. It is illogical, says Parametric, to focus on stripping out fees when retiree fund members would benefit almost twice as much from their funds cleaning up implementation leakages.
Williams would like to see superannuation funds planning fund mergers – or other big portfolio changes – pay particular attention to the research findings.
“These controllable costs are positively correlated with portfolio changes. The more changes your fund is planning, the more you are incentivised to put an efficient implementation platform in place before you instigate the changes. I understand the temptation to put off new ideas until the big changes are delivered, but superannuation funds with a busy change program should consider prioritising the initiatives that will make the rest of their changes easier to implement and less costly to members.”
For more information please contact:
Simrita Virk at Shed Connect
Parametric Portfolio Associates® LLC (Parametric), headquartered in the U. S. in Seattle, Wash., with Australian offices at L25, 259 George St, Sydney NSW 2000, is registered as an investment adviser under the U. S. Securities and Exchange Commission Investment Advisers Act of 1940. Parametric is exempt from the requirement to hold an Australian financial services license under the Australian Corporations Act 2001 (Cth) (Corporations Act) in respect of the provision of financial services to wholesale clients as defined in the Corporations Act and pursuant to the Australian Securities and Investments Commission's (ASIC) Class Order 03/1100 and ASIC Corporations (Repeal and Transitional) Instrument 2016/396. SEC rules and regulations may differ from Australian law. Parametric is not a licensed tax agent or adviser and does not provide tax advice in Australia or any other country. This material is intended for wholesale use only and is not intended for distribution to, nor should it be relied upon, by retail clients. With over $245 billion USD of assets under management as at 30 June 2019, Parametric is a global asset management firm offering investors a variety of portfolio solutions, including tax-managed centralised portfolio management, taxmanaged indexing and factor investing strategies, as well as emerging markets and defensive equities strategies. Parametric Australia is a division of Parametric Portfolio Associates® LLC that is a majority-owned subsidiary of Eaton Vance Corp, one of the world's most dynamic global asset management companies.
For more information please visit website: www.parametricportfolio.com.au