A new perspective on investing could see a big shift in the way managed funds are matched to investors’ needs.
A new perspective on investing could see a big shift in the way managed funds are matched to investors’ needs.
Navigator Research has investigated a range of major Australian equity funds from a tax efficiency perspective.
Navigator Research manager, Stuart Fechner, said: “We looked beyond the performance percentages and assessed the tax efficiency for 15 funds on the Navigator list with the highest franking levels in 2005.”
Aberdeen Financials Fund was the top-scorer for tax efficiency in the 2005 income tax year.
Perpetual’s Wholesale Geared Fund was ranked second in the comparison while BT’s Wholesale Australian Share Fund finished third.
“The typical investor only considers risk and return. This research shows they should be investigating a third factor - the tax take,” said Stuart. “We have looked beyond the performance percentages to see how to really keep more dollars in your pocket."
The Navigator survey established that the important factors affecting overall tax efficiency were:
- Franking levels
- Stock turnover (churning)
- Capital gains distribution
- Net unit movements and
- Use of gearing.
The comparison scored each of these factors for the funds, with the scores weighted and aggregated but excluding fund investment performance, the tax payable by unitholders and the effects of trading units in the funds. An investor would also need to consider these and other factors in choosing which fund is appropriate for their investment.
“Ultimately, tax efficiency depends on the investor’s personal circumstances,” said Stuart. “For example, an investor at the top marginal tax rate would seek higher franking credits which can be used to offset income and reduce tax payable.
“However, will need to watch out for capital gains distributions which may increase the overall tax bill.
“If the focus is on growth equities, attempt to hold off selling holdings for at least 12 months in order to be eligible for a CGT discount.
“When investing in a geared fund, however, an investor will find that interest commitments will reduce income flows,” said Stuart. “Geared investments must be income yielding, eg dividends, to claim interest deductions and particular caution should be exercised if using any ‘double’ gearing strategy. The use of gearing magnifies an investment’s sensitivity to the market. This can mean greater returns when times are good but on the other hand, greater losses on the flip side.”
Even the low-taxed SMSF and superannuation investor has to take in new considerations … not all of them tax-based, he warned.
“Watch out for high stock turnover in a fund which can erode its returns, such as transaction costs,” he said. “Geared investments might also be best avoided as it may not be prudent for superannuation due to the increased sensitivity to market risk.”
The survey findings have implications for pensioners and pension investors.
“Geared investments might be best avoided as it may not be prudent for this stage of an investor’s life cycle,” said Stuart.
“The level of distributions received and investment value growth will need to be considered as they impact on the income and asset tests for pensions
“Seek higher franking credits which can be used to offset income and reduce tax payable. However, advisers will need to watch out for capital gains distributions which might increase the overall tax bill.
“Tax will not be an issue if invested through an allocated pension or pension product within a super plan as investment earnings are tax exempt within the plan.”
The results of the Navigator survey saw the Aberdeen fund topping the assessment – “largely driven by its good showing across the considered factors,” said Stuart.
“The Perpetual geared fund came second, benefiting from its use of gearing while the BT fund came in third on the back of a consistent showing across the assessed criteria.
“The fourth-placed Vanguard Australian Shares Index Fund could be regarded as a proxy benchmark due to its passive, index-matching style.”
The other Top 10 funds, listed in descending order, were: AXA – Wholesale Australian Equity Fund – Industrials Fund; MLC Investment Trust IncomeBuilder; Merrill Lynch Wholesale Australian Share Fund; Ausbil Australian Active Equity Fund; Tyndall Australian Share Wholesale Portfolio; Investors Mutual Australian Share Fund.
-ends-
Stuart Fechner is available for interview on 0407 839 080
For further information please contact:
Simon Morgan
Group General Manager Public Affairs
Phone: (03) 9829 8892
Mobile: 0407 966 632
Notes to editors:
- Aviva Australia is a group of two specialist financial services companies: Navigator and Norwich Union Life Australia Ltd. Portfolio Partners is the Australian funds management arm of Aviva plc. Through these companies we provide products and services in the areas of wealth creation and wealth protection for more than 300,000 customers throughout Australia.
- Globally, Aviva Australia is part of Aviva plc, the world's sixth largest insurance group, the largest insurer in the UK and one of the top five life companies in Europe. Aviva was formed in May 2000 through the global merger of CGU plc and Norwich Union plc.
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- The information in this document reflects Navigator Australia Limited's ('Navigator') ABN 45 006 302 987 understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information given in this document is of a general nature and has not taken into account the investment objectives, financial situation or particular needs of any particular person and it is not a substitute for professional advice. A PDS is available from NULIS or your financial adviser. Applications to invest in investment product(s) through the investor directed portfolio service ("IDPS"), operated by Navigator, must be made by completing the application form attached to the applicable IDPS Guide Offer Document and Investment Allocation Authority. Before making an investment decision on the basis of the information above, a prospective investor needs to consider, with or without the assistance of a professional adviser whether the information is appropriate in the light of their particular investment needs, objectives and financial circumstances. Aviva does not receive any remuneration in relation to the provision of information available from this press release which is of a general nature only.