A comparison between Australian equity funds on the Navigator list has shown that Aberdeen Financials Fund was the top-scorer for tax efficiency in the 2005 income tax year.
Your managed fund might boast big returns – but what’s its post-tax performance? A new Navigator Research survey reveals which funds really put the bucks in the back pocket.
A comparison between Australian equity funds on the Navigator list has shown that Aberdeen Financials Fund was the top-scorer for tax efficiency in the 2005 income tax year.
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.”
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.
“Our assessment focused on key fund characteristics and considered their likely tax effects,” said Stuart.
“Ultimately, tax efficiency depends on the investor’s personal circumstances, but we found that franking levels and churning were important factors affecting overall tax efficiency.”
The survey also found that tax efficiency also involves others factors such as:
- 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.
“The Aberdeen fund topped our 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 due to higher stock turnover.
“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.
The Navigator Research survey compared the funds on each of the factors affecting post-tax performance. The results were:
Franking
Franking is arguably the most important factor affecting tax-effectiveness and, in this category, the Perpetual Wholesale Geared Australian Fund had well above industry-average franking benefits.
“It is able to maximise franking by the use of gearing and has systems in place to discern the tax effects of trading,” reported Stuart. “Interestingly, both Aberdeen and BT ranked in the top five without using gearing.”
Stock Turnover
Stock turnover comparisons are difficult to evaluate, said Fechner. “The level of turnover can be an indicator for capital gains; although caution would need to be exercised. A turnover figure by itself is not the whole story. The issue can be complicated by good and bad turnovers relating to their flow-on consequences.”
The Navigator Research survey ranked Vanguard’s index-matching style as top in the category, recording 2% stock turnover compared with the sample average of 31.5%.
Net Capital Gains
CGT can be “an expensive after thought” of stock trading, Fechner said. Fund managers do not usually disclose the level of capital distribution and the Navigator data – that put the BT Wholesale Australian Share Fund top – was derived from Navigator’s experience as an investor in the funds.
Stuart noted: “Of course, the effect of capital gains is determined by the length of time the asset is held and the position of the taxpayer to offset capital gains against losses.”
Net Unit Movements
“During the period the Ausbil Australian Active Equity Fund experienced extraordinary growth, attributable to the positive attention it received for its performance,” said Stuart. It experienced a 605.7% unit level increase, compared to a sample average of 49%.
Geared Funds
Only three of the 15 sample funds were geared and, of these, the Perpetual Wholesale Geared Australian Fund was ranked first in that category.
Stuart said: “Different investments styles are necessary because there are many different types of investor. This comparison by Navigator Research levels the playing field.”
The survey lists the issues facing different investor needs:
| Investor at the top marginal tax rate | 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 |
| Geared investor | Interest commitments will reduce income flows and capital distributions may give rise to an additional tax liability, i.e. additional funds may be required to meet tax liability due to capital distributions Geared investments must be dividend yielding to claim interest deduction Caution should be exercised if using "double" gearing in an investment as gearing magnifies an investment’s market risk |
| SMSF and Super investor | Both enjoy low tax rates, hence considerations other than tax may be more important Watch out for high stock turnover in a fund which can erode its returns, eg due to transaction costs Geared investments may also be best avoided as it may not be prudent for superannuation, eg due to the increased market risk |
| Pensioner / Pension investor | Geared investments may also be best avoided as it may not be prudent for this stage of an investors life cycle, eg due to the increased market risk 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, will need to watch out for capital gains distributions which may 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 |
-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
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