Super funds could benefit from after-tax focus with factor investing
Super funds need to focus more on after-tax benefits when it comes to factor investing strategies instead of seeing only pre-tax benefits, according to Parametric’s research.
The research highlighted the misconception that factor investing was ‘naturally tax efficient’ and identified potentially significant tax drag associated with new factor strategies.
According to Parametric’s managing director of research in Australia, Raewyn Williams, the aim of the research was not only to show funds what factor strategies looked like after tax but also to show the benefits of “loading the tax dice’ in funds’ favour”.
“We wanted to show the benefits of ‘loading the tax dice’ in funds’ favour – that is, employing specific portfolio construction and tax management techniques to claw back some of the 64 to 86 basis points annual tax leakage in our hypothetical factor strategies.
“Our research results are very encouraging to funds.
“In every case, we were able to reduce the tax drag in the factor strategy, in some cases, the tax drag was halved. Importantly, this is not done at the expense of the overall returns of the factor strategies,” she said.
According to Parametric’s research co-author and Seattle-based chief investment officer, Paul Bouchey, the tax-managed factor investing could also improve a factor approach by adding an extra return source for the sponsor of this new idea.
“Clawing back some of the innate tax leakage could even be a way to finance a factor approach – if the tax clawback offsets the fee for the factor approach, then funds could target factor outperformance with no net of fees and taxes price impact to the funs in option-level unit prices,” he said.
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