Financial Standard Comments - Active management a 2% tax drag

Comment by Don Hamson (Plato Investment Management)

Don Hamson (Plato Investment Management) — Wed, 27 Mar 2013 15:33:32 +1100

The 2% number might be correct if you are a top marginal tax payer, but for most people their investments in equity are largely via superannuation, the cost is far lower. Any article that talks about tax should state up front what tax rate individual they are talking about. For instance, for the $400B in pension money, capital gains tax is irrelevant, so the only costs would be lost franking.

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Comment by Peter Vann (Independent consultant)

Peter Vann (Independent consultant) — Wed, 27 Mar 2013 15:54:25 +1100

I strongly agree with Scott that portfolios should be managed on an after tax basis, and I stress that the after tax calculations must be appropriately structured unlike some which just get part of the way there.
However some points in the article I disagree with.
1) retirement strategies using tax free regime don't have tax drag, assuming one doesn't miss franking credits.
2) Phil Dolan and I independently estimated the pre-tax alpha one needed from active Aussie portfolios to match the benchmark on an after tax performance basis and agreed that it is around 3/4%; somewhat less than expressed in the article!
3) if active managers can identify "stocks that anyone with half a brain wouldn't go anywhere near" why doesn't the industry perform better? Is the quote implying the industry had less than half a brain?

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Comment by Jeremy Cooper (Challenger)

Jeremy Cooper (Challenger) — Wed, 27 Mar 2013 20:45:18 +1100

The issue about the pension phase is that while CGT is suddenly irrelevant, most funds are not managing this properly so the benefits are lost. There is a lot of room for improvement here.

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Comment by mark rogerson (aims-stm pty ltd)

mark rogerson (aims-stm pty ltd) — Tue, 02 Apr 2013 10:08:33 +1100

Parcel picking for the pension phase is just as relevant as it is for CGT in the super phase if you want to optimise tax in the long term. The reason for this is that when you die you want the pension fund to have used all the low cost parcels so the ongoing CGT liabilities for your beneficiaries is therefore low.

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