Tax-Managed CPM. Andrew Spence Chief Investment Officer Qantas Superannuation Limited

Transcription

1 Tax-Managed CPM Andrew Spence Chief Investment Officer Qantas Superannuation Limited

2 Introduction Two years ago Qantas Super implemented a fundamental change to the way it structured its $3 billion in Listed Equities. We call it Tax-Managed Centralised Portfolio Management (CPM). Why did we implement change? What benefits has this innovation delivered? What risks and costs were involved? How did we do it?

3 Manager Functions in a Traditional Multi-Manager Structure Stock Selection Portfolio Construction Trade Execution Liquidity Management Proxy Voting Tax Management Performance Reporting Manager A Manager B Manager C Manager D + Transition manager (where required) QUESTION Does this deliver optimal fund level results?

4 Where Value Leaks in a Multi-Manager Structure Stock selection Portfolio construction Trade Execution Liquidity Management Proxy Voting Tax Management Performance Reporting Manager A Manager B Manager C Manager D + Transition Manager (where required) Transaction and tax costs Time and resource commitment Lack of agility Redundant trades Higher turnover Higher transaction costs Multiple cash accounts Cash drag Inconsistent proxy voting Active share ownership tough to pursue Managers can only manage tax for their own portfolio Inconsistent after-tax measurement Typically pretax; limited ability to assess aftertax outcomes ANSWER No, implementation leakage drags down fund level results

5 Qantas Super s Solution: A Multi-Manager Structure with Less Implementation Leakage Stock Selection Portfolio Construction Trade Execution Liquidity Management Proxy Voting Tax Management Performance Reporting Manager A These activities are centralised and implemented by the CP Manager Manager B CP Manager is benchmarked against the aggregate of the individual manager portfolios Manager C Manager D + Transition manager (where required) No longer required Centralised Portfolio Manager Custodian QUESTION Does this deliver optimal fund level results? ANSWER Yes. Qantas Super now has a single whole of Plan trade execution model for Listed Equities and FX which delivers significant net benefits to Members without degrading manager alpha

6 Qantas Super Global Equities Transition Case Study Tax-Managed CPM and Rebalancing - Global Equities (December 2013) Revised GE manager weightings due to the replacement of 1 active manager plus the addition of a passive indexed manager Manager CPM Portfolios Portfolio Outcomes Sell Turnover 26.6% 7.6% Lower turnover Trades 2, Less equity trades Brokerage Commissions $356,000 $101,000 Lower brokerage FX Transactions $301 million $165 million Less FX trades Capital Gains Tax $83 million $9 million More tax-efficient Tracking Error Comfortably within 0.00% 0.50% (estimated) mandate guidelines

7 Qantas Super Net Benefits Generated for our Members Tax-Managed CPM Since Inception (to 30 June 2014) Basis Points (p.a.) Net Increase in After-Tax Return** ($A p.a.) Australian Equities 86.0 $9.3 million Global Equities 71.0 $10.0 million Listed Equities 77.5 $19.3 million Agency FX Since Inception (to 30 June 2014) Gross Volume ($A p.a.) Traded Volume ($A p.a.) Net Savings (A$ p.a.) FX $1.4 billion $1.0 billion $1.5 million Qantas Super s implementation efficiency initiatives, including Tax-Managed CPM, have delivered $23.6 million p.a. in net benefits to Members, equivalent to 38.3 basis points p.a. at the Growth (default) option level

8 Qantas Super Risks and Costs Return benefits are shown net of all CPM costs. Qantas Super did not use the move to CPM to argue for lower investment management fees (respecting its managers as key investment partners). Key risks to manage: Investment risk CP Manager tracking error budget of basis points p.a. Operational risk Undertook operational due diligence, obtained annual SSAE 16 sign-off as CP Manager now one of Qantas Super s top 3 service providers Tax risk Big 4 tax adviser signed off Tax-Managed CPM (covering Part IVA) and after-tax performance methodology. Dominant purpose is always for CP Manager to implement exposure to multi-manager composite benchmark (with tax always a secondary consideration). Tax never initiates a trade and is only considered when there are real reasons to transact (cash flows, rebalancing, etc).

9 How did we do it? The Organisational Enablers for Innovation The fund (who we are) How the fund behaves (cultural attributes) What the fund believes (investment philosophy)

10 Requirements for Implementing Tax-Managed CPM About Qantas Super The Qantas Superannuation Plan (Qantas Super): The fund (who we are) is one of Australia s largest corporate superannuation funds is run for the benefit of current and former employees of Qantas Airways Limited and its associated companies has been operating since 1939 currently has 33,000+ members and over $6 billion in assets.

11 Requirements for Implementing Tax-Managed CPM Qantas Super s Cultural Attributes How the fund behaves (cultural attributes) An ability to think innovatively A Listed Equities structure based on individual mandates A belief that implementation efficiency can deliver meaningful net benefits to Members Leadership, with close collaboration between investment and operational teams A strong partnership approach across a broad range of providers (managers, custodian, tax adviser, etc) Strong project management capabilities An Investment Committee and Board that can embrace change An organisational will to take action!

12 Requirements for Implementing Tax-Managed CPM Qantas Super s Investment Philosophy What the fund believes (investment philosophy) Why is Implementation Efficiency Important? Market returns (beta) and manager outperformance (alpha) are inherently uncertain but funds rightly continue to pursue them with vigour. Implementation costs are very real and certain but funds don t typically pursue them with vigour. Our Investment Belief Qantas Super has a specific belief regarding investment implementation, namely: Implementation efficiency can deliver meaningful benefits to enhance the management and transparency of investment execution This promotes the financial interests of our Members after fees and taxes as is now required of trustees under the SIS Act. Our Implementation Efficiency Focus Qantas Super s journey began in mid-2010 with a focus on the following key areas: Transition Management November 2010 Trade Cost Analysis in FX and Listed Equities December 2010 Overlays and Management of Currency / Liquidity May 2011 / January 2012 Tax-Managed CPM August 2012

13 To Recap Two years ago Qantas Super implemented a fundamental change to the way it structured its $3 billion in Listed Equities. We call it Tax-Managed Centralised Portfolio Management (CPM). Why did we implement change? ANSWER To enhance the management and transparency of investment execution for the benefit of Qantas Super Members What benefits has this innovation delivered? ANSWER $23.6 million p.a. from Listed Equities and FX, or 38.3 basis points p.a. on Qantas Super s growth (default) option How did we do it? The fund (who we are) How the fund behaves (cultural attributes) What the fund believes (investment philosophy)