14 Oct 2009

HESTA expects to add tens of millions of dollars to the value of its Australian share portfolio by revolutionising the way its fund managers work.

HESTA is the first super fund to measure and remunerate fund managers on their after-tax investment returns, making them accountable for the tax implications of their decisions.

Fund managers are traditionally measured on pre-tax returns, leading them to not value franking credits that are attached to dividends and to ignore timing decisions that would protect discounted capital gains. With super taxed at 15% and the franking credits worth 30%, the pre-tax approach to valuing company dividends is costing investors millions.

Experts including ASIC have long argued that fund managers should be judged on their after-tax results but fund managers claimed it was too difficult to achieve a fair and accurate measurement of their performance on an after tax basis.

HESTA has overcome that obstacle with the assistance of Warakirri Asset Management who developed the rules and processes that enable post tax performance to be appropriately measured, according to HESTA Executive Manager – Investments and Governance Rob Fowler.

“HESTA is one of the first super funds to require fund managers to revolutionise the way they operate. We are judging them on their performance in the real world where tax affects our members’ retirement savings,” Mr Fowler said.

“We are asking them to work harder for our members, and they have taken up the challenge because the measurement process is individualised and fair.

“HESTA will help fund managers develop their after-tax investment capability by calculating benchmarks and returns for each individual fund manager, and providing feedback.

“We are working with innovative fund managers who are willing to do things the right way instead of the easy way. They will be assessed on their after-tax performance.”

HESTA has asked all 16 of its fund managers to adopt the new methodology. Half began on 1 July, with the rest expected to phase in the new system in preparation for a July 2010 changeover.

The move will encourage fund managers to adopt lower turnover strategies, appropriately value franking credits and more actively participate in share buybacks.

“Other super funds will say that they consider franking credits in share selection but that’s a vague commitment. What gets measured gets done, and we’re asking our fund managers to measure what counts,” Mr Fowler said.

“We believe this approach has the potential to change not only the work of portfolio managers and dealers, but also of analysts who will need to ensure they include the value of franking credits in their company valuations.”

The move is part of a broader push by the health and community services sector industry fund to encourage longer-term thinking from fund managers.

“We expect the new system will add many millions of dollars to the value of our Australian shares portfolio every year. For members invested in Australian shares through their HESTA super fund, that means more money in their pocket on retirement,” Mr Fowler said.