Northern Trust: Better Investment Returns Through Tax Efficient Fund Structures

Choice of cross-border investment vehicles can have a measurable impact on asset manager performance and investors’ returns over time, new research by Northern Trust shows.  

(January 20, 2012) — Tax transparent asset pooling vehicles can enhance returns by as much as 8.1% over a 10 year period, research by Northern Trust has demonstrated. 

The firm — with assets under custody of $4.3 trillion and assets under investment management of $662.9 billion as of December 31, 2011 — noted that against the backdrop of daily market volatility, global economic uncertainty, and continuing pressure to reduce costs, investors are especially eager for ways to increase their returns. Northern Trust’s modeling showed that by doing nothing differently in terms of stock selection and strategy, but by choosing the right fund, performance can improve by as much as $81 million on a $1 billion portfolio invested in broad market indices over a 10 year period, Northern Trust pooling business development manager Gwyn Koepke told aiCIO

“As countries across the globe implement taxation changes, or consider proposals to do so, the modeling Northern Trust created as part of our analysis enables fund managers and end investors to understand in quantifiable terms the financial impact of investing in global equity markets through a tax transparent fund versus other popular collective investment vehicles,” said Phillip Caldwell, pooling product manager at Northern Trust, in a statement.

Caldwell added: “The local revenue authorities in many investment markets are raising standard withholding tax rates, but at the same time a number of investors, such as pension funds, are seeing the rates they pay under double tax treaties fall. As this trend continues, the divergence in performance between an investor able to access these rates through a transparent fund and an investor in a non transparent fund will only increase.”

In 2010, Deloitte estimated that more than $31 billion (£20 billion) of additional multinational pension fund investments would be made in the UK. 

“Over the past ten years Deloitte has worked closely with multinational companies and investment management groups in establishing tax transparent investment vehicles,” said Gavin Bullock, a Deloitte partner, in a statement released in late 2010. “For multinationals these have resulted in material economies of scale and improved governance for their international pension funds. In addition, leading investment managers have gained a competitive edge by taking advantage of the tax efficiencies that these vehicles can offer,” he said, adding that the increase of tax transparent vehicles in the UK will significantly increase the competitiveness of the financial services sector.

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