The current environment is making superannuation funds look at any opportunity to make their assets work harder for the costs incurred, according to Parametric head of Australia, Chris Briant.
He has observed a renewed focus on after-tax returns, brokerage and foreign exchange costs and the potential tax costs of poor transition management.
“Any opportunities to keep more money in the members’ pockets are absolutely what funds are looking at at the moment,” Briant says.
The hidden costs of transition
Parametric has conducted research that found that superannuation funds could potentially save thousands through more efficient management of transitions.
“It’s a little known fact that one of the fastest way to create a really major tax bill is through transitions that are not being tax managed,” Briant says.
In a research paper completed earlier this year, Raewyn Williams, Parametric managing director, research, detailed some of the techniques that could be employed for a better overall outcome for members.
The majority of Australian dividends are paid out during February, May, August and November and ill-timed Australian equity transitions could breach the 45-day holding tax rule, the period for which shareholders are required to hold stocks after the stocks go ex-dividend to be eligible to claim franking credits for those stocks.
If there is no immediacy surrounding a transition, it is worth waiting out the 45-day holding periods where possible, as every $1 of a fully franked cash dividend is worth $1.21 to an accumulation member and $1.43 to a pension member of a super fund.
Trading of cum-dividend stocks could be delayed until the portfolio becomes entitled to receive dividends and associated franking credits and trading could also be deferred for some short-term holdings until the 12-month capital gains tax discount applies.
The Parametric paper found that tax leakage for one transition event could cost a fund over six times the initial transaction cost.
Briant, who has been working in the superannuation industry for nearly three decades, believes that funds are currently under more pressure to deliver in all aspects of their operations than any other time in his career.
“Funds are doing a lot of restructuring, they are answering questions like - Are my active equity managers delivering good idiosyncratic risk or could I receive lower costs and better returns by investing in a factor strategy?.”
Parametric has recently launched its Equity Agility Platform to help funds with all aspects of implementation, including transition management, tax-effectiveness, foreign exchange cost management and brokerage.
“They can get the whole lot solved in one place - reduce your brokerage cost, reduce your turnover, potentially reduce your foreign exchange, and they no longer have to hire an extra transition manager,” Briant says.
The platform is offered on a standard basis point base fee based on assets which comes down sharply with scale.