A global asset manager linked to Australian superannuation funds has been toiling with passive and smart beta strategies over the past year on the back of renewed interest.
Such is the interest that Parametric Australia expects to double its assets under management from $3 billion to $6 billion by the second quarter of 2016, announcing new clients with at least one after-tax passive mandate.
Speaking to Financial Standard this week, Parametric said tax costs at a super fund may be anywhere up to 2.5 times the fees paid to investment managers and it was becoming critical to examine where savings could be made.
US-based Parametric chief investment officer Paul Bouchey said superannuation funds expecting 2% long-term excess returns from smart beta indexes can expect to give most of the outperformance back to the government in taxes if they're not carefully managing the strategy.
"If you actively manage the taxes of those indexes, by deferring the realisation of capital gains and at times accelerating the realisation of capital losses, you can mitigate some of those effects," Bouchey said.
Parametric Australasia chief executive Chris Briant said super funds were losing about 0.25% per annum to passive strategies by not thinking about taxes. He said some funds think smart beta is just like passive and therefore carries a small tax rate "but actually that's really not true."
"There's a big tax drag. It's more like an active manager tax drag," Briant said.
Bouchey said for a fully active portfolio that has between five to ten active managers, Parametric could increase the tax efficiency by 0.5% to 1% per annum.
"Every time you trade or selling a security there's potential tax consequences. Some things that look really good from a return risk perspective, like high frequency trading for example - which looks like very low risk and very high returns but if you look at it through the lens of after tax, it suddenly looks worse than a traditional bond strategy," Bouchey said
"The frictions are real and not a lot of people pay attention to them."