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 Financial Happenings Blog 
Monday, November 05 2007

My wife and I are hoping to return to Jakarta over Christmas and are scouring the cheap online travel websites to source the best deal possible.  Many of you will have seen the recent commencement of flights by Air Asia from Coolangatta to Kuala Lumpur.  I checked out the deals and became really excited at finding their cheap airfares.  However as I began to dig deeper it soon became clear that these fares did not include meals or baggage costs.  (At least they did include airport taxes in their headline fares.)  Fair enough I guess because they had a tiered baggage charge depending on how much luggage you checked in - $7 for 1-15kg, $42 for 16-20kg, $77 for 21-25kg and so forth.  Meals were $7 per meal.  Adding the baggage and meal charges soon led to the fares becoming very similar to fares offered by other airlines.

 

This scenario is analogous with the way managed funds quote their performance.  Some will state their performance gross of fees, similar to how airlines quote their fares without including airport taxes.  However, most now do take fees out giving a fuller picture of the actual performance.

 

Unfortunately, very few funds give performance results after tax.  Really this is what the investor wants to know.  How much of the investment returns will actually make their way back into the investor's hip pocket.  I guess this is like Air Asia not quoting prices with baggage or meal charges included.  Both do not really get a full picture of the end result for investors or travellers.

 

Like managed funds, Air Asia will most likely say they do not do this because not all passengers will need to access baggage services and therefore will not incur this cost similar to the managed fund world with investors on 0% marginal tax rates.  The trick for investors is to make sure they get a full picture of the tax liabilities they are likely to incur on their funds.  It can make a huge difference to what you actually receive.

 

The two fund providers that we prefer - Dimensional Fund Advisors and Vanguard both give investors and prospective investors performance details after tax covering all of the different marginal tax rates.  They both have good reason in doing do as they use investment strategies that try to reduce turnover and the realisation of gains as income for investors.  We believe this is another part of the story that makes these funds the basis of a successful investment outcome.

 

Please drop us a line if you would like to know more about the impact of tax on fund performance.

 

Regards,

 

Scott Keefer

Posted by: Scott Keefer AT 05:46 am   |  Permalink   |  Email
 
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