Franking levels and churning are among the most important factors determining the overall tax efficiency of Australian equity funds, according to a new Navigator Research report.
Franking levels and churning are among the most important factors determining the overall tax efficiency of Australian equity funds, according to a new Navigator Research report.
Stuart Fechner, Navigator research manager, said: “The typical investor would only considers risk and return. This research shows they should be investigating a third factor - the tax take.
“We have looked beyond the performance percentages to see how to really keep more dollars in your pocket.”
The survey also found that tax efficiency also involves others factors such as focused on tax efficiency factors such as:
- franking level
- stock turnover
- capital gains distribution,
- net unit movements and
- use of gearing
Stuart said: “We looked beyond the performance percentages and assessed the true returns for considered the tax efficiency of Navigator’s the top 15 Australian equity funds on Navigator with which had the highest franking levels in 2005.”
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 comparison showed that Aberdeen Financials Fund was the top-scorer for tax efficiency in the 2005 income tax year.
Stuart Fechner said: “We looked beyond the performance percentages and assessed the true returns for Navigator’s 15 funds 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 came in third.
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 a franking level well above the sample average.
“It is able to maximise franking by the use of gearing and has systems in place to discern the tax effects of trading – although tax is not the primary focus,” 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. For example with good turnover, a fund may have high turnover however the consequent gains and losses net each other off resulting if in little if any capital gains distributions.”
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 afterthought” 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 came in second overall when all factors were combined.
Stuart said: “Different investments styles are necessary because there are many different types of investor. This comparison by Navigator Research levels the playing field.”
-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:
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