Parametric questions custodial efficiency

Super funds need to understand the differences between using a custodial solution and a specialist implementation manager before making a decision, Parametric Portfolio Associates believes.

The firm released their after-tax report on Monday comparing the choices of propagation and tax-managed centralised portfolio management (tax-managed CPM) as they are becoming the top two choices when funds consider the topic of investment tax leakage on super portfolios.

Parametric's research and after-tax solutions director, Raewyn Williams, said the investment adviser was concerned that there is little practical information to help funds to make the choice.

"The results show a significant basis points return increase each year form tax-managed CPM versus propagation. Many fund decision-makers will be surprised at the size of this return difference," Williams said.

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"Our research identifies portfolio characteristics that could increase the value the custodian provides through propagation. However, 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."

Williams noted there are legitimate reasons as to why funds might opt for a ‘light-touch' solution like propagation and after-tax solutions are always a question of ‘best-fit' for a particular fund.

"Inefficient implementation has real, even if not measured, costs to superannuation funds and members," she said.

"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-naïve traditions of the past."