There is growing interest among Australian super funds in the potential benefits of Centralised Portfolio Management (CPM) says Raewyn Williams, Director of Parametric’s Research & After-Tax Solutions.
Ms Williams said that recent research, in particular a Towers Watson paper, shows how CPM is designed to capture value lost from tax, and implement efficiency in equity portfolios to improve funds’ investment outcomes.
“It is great to see that there is some good research on the potential benefits of CPM,” said Ms Williams.
“The Towers Watson paper shows not only how CPM works and its issues, but also how investors can gain greater control over their portfolios.” she adds.
The Towers Watson paper, Centralised Portfolio Management, outlines CPM as a simple concept – portfolio implementation and execution is separated from investment idea generation and managed through a single platform via a centralised provider – the CPM manager.
It notes: “The CPM manager implements trades put forward by the portfolio’s underlying active managers, taking a whole-of-portfolio focus with an aim to minimise transaction costs and tax, while balancing the tracking error introduced relative to the underlying portfolio.”
Ms Williams says: “Towers Watson characterises implementation efficiency as often being a secondary concern to funds management.” The paper also, “observes that having a number of equity managers each independently conducting the same highly scalable function (implementation) is far from ideal”.
As the Towers Watson paper notes, says Ms Williams, not all CPM approaches are the same.
“It is important to differentiate in particular between tax-managed CPM and old-style emulation solutions which may have in-built lagging conditions and continue to ignore tax in the way the portfolio is managed and outcomes measured,” she says.
Ms Williams agrees that it can be difficult to quantify the benefits of CPM, but notes that Parametric is in the exceptional position of being able to run a conservative projection of the potential benefits of CPM based on a fund’s own transactions history.
“Parametric has run a number of analyses for different Australian funds based on each fund’s own transaction history to quantify the potential after-tax return benefits of tax-managed CPM.”
“Inferior CPM solutions do not provide detailed performance reporting and attribution, pre-tax and after-tax, across all components of the CPM solution. “A focus of Parametric’s tax-managed CPM is the comprehensive benchmarking and reporting and complete transparency across the CPM structure.” she adds.
“While the Towers Watson paper does not make comments about any particular solutions or providers, the research they will conduct for their clients during 2015 will be an important step in connecting super funds with best of breed after-tax and implementation solutions in the Australian market,” said Ms Williams.
Seattle-based Parametric Portfolio Associates LLC is a subsidiary of Eaton Vance Corp. and has 25 years of experience offering tax-managed investment solutions to U.S. retail investors. Since 2012, Parametric has been working with Australian institutional investors to explore ways to trade more effectively and efficiently.
Leave a Comment
You must be logged in to post a comment.