The superannuation industry needs to adopt a centralised portfolio management (CPM) system as an after-tax investment solution, especially with capital gains tax (CGT), according to Parametric.
In a paper titled ‘What Should Managers Manage?' Parametric said super funds know they are required by law to think about tax in their investment strategies but have not figured out how best to do this, and investment managers do not help.
"Increasingly, superannuation funds are asking their investment managers to move from a pre-tax to an after-tax investment focus, however what is missing is a good understanding of what types of taxes can actually be managed effectively by the manager and what taxes need to be managed in a more holistic way," director of research and after-tax solutions in Australia Raewyn Williams said.
The paper said CPM allows managers to produce investment ideas within their individual portfolio sleeve, but the execution is centralised to allow portfolio management on an after-tax basis.
The central manager then receives the recommended trade lists from the managers, and can pinpoint and eliminate ‘redundant' trades and use a small tracking error budget to solve tax inefficiencies.
The paper said that while investment management fees and other costs always gets the spotlight, what is ignored is investment taxes costs super members about $3.253 billion a year.
Williams believes individual managers managing CGT separately can cost more money and increase investment risk to the fund.
"CGT management requires an overview of the whole portfolio to be effectively managed, hence the advantages of appointing a CPM to manage CGT and certain other taxes instead of the underlying individual managers," she said.