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Financial Happenings Blog
Wednesday, May 30 2007

As the end of the financial year approaches everyone starts focussing on tax.  The financial media is no different.  In today's edition of The Age, an article entitled Tax Slug hidden highlighted the importance of tax issues when considering the choice of investment funds.  It reports that many managed funds choose not to report their after tax returns and they have good reasons in not doing so (for them, not for the investor) as their end returns would get knocked around and not look so rosy.  Unfortunately for the investor, it is the after tax returns that are most important as this highlights what they actually will get in their pockets after fees and taxes.


Two major issues affect the tax effectiveness of managed funds - the franking level of the portfolio and the amount of 'churn'. (i.e. how much trading a fund is doing)


Franking level relates to when companies, that have already paid company tax on their profits, can provide their shareholders with franking credits on their dividends.  This means that the shareholders do not have to pay tax on these dividends.  The more franking credits, the better the scenario for investors.


The more that a managed fund buys and sells shares generally the lower is its tax efficiency because as the fund sells shares it realises capital gains and tax is payable by investors on those capital gains.  Another negative aspect of portfolio churn is the increased level of transaction costs that are incurred when buying and selling rather than holding on to assets.


The article in The Age highlights the performance of Vanguard in reducing the tax consequences of its funds as they use an index style approach which focuses on buying and holding portfolios based on the market (index) rather than actively picking shares.


We use Vanguard funds in the portfolios we develop for our clients along with Dimensional funds.  Both have a similar index or index style approach where they reduce the tax consequences for investors and in doing so produce excellent returns not just before tax but after tax also.  If you would like to know more about these fund managers take a look at their websites: and .



Scott Keefer

Posted by: Scott Keefer AT 12:17 am   |  Permalink   |  Email
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