Financial advisers and their clients are reaping the benefits of having enhanced capabilities such as managed portfolios and tax optimisation at their disposal from which they can extract value or platform alpha.
However, this opportunity is now also available to portfolio managers, who just like advisers and their clients are operating in challenging market conditions of the value chain where everyone is looking to eke out some additional value to try and get that little bit of extra return.
HUB24 has worked with Milliman to provide some research to quantify the benefits of the enhanced capability it has developed for portfolio managers.
Known as Progressive Portfolio Implementation or PPI, the research suggests functionality available on platforms such as HUB24 can provide substantial improvements to investment performance and tax outcomes.
Tools for managers, value for clients
Available on portfolios where a manager has opted to use it, PPI provides portfolio managers with the ability to tailor investment decisions to target better outcomes that reflect changing market conditions.
This capability means managers can implement alternative portfolios for new client funds, allowing them to unlock value for clients that is not possible with other managed portfolio solutions.
The underlying technology within the platform structure gives portfolio managers greater flexibility, a development which Milliman Australia’s principal Wade Matterson has said will open new opportunities beyond the traditional investment models used in the past which could provide less flexibility.
Instead, portfolio managers can act earlier to benefit new investors for instance but still retain the value emerging from the way some other investors are currently positioned, so it is providing portfolio managers with more scope.
In practice, the PPI capability could be used to retain existing clients invested in managed funds which have been hard closed or where a portfolio manager believes a share is reaching its target price. They can cease investing new funds in those shares while retaining existing client funds invested, avoiding triggering capital gains tax (CGT) and transaction costs.
Finally, if a portfolio manager thought an asset could be shortly removed from a portfolio, they could hold new funds in cash or other investment options, or choose to hold existing shares to qualify for franking credits while investing new funds in alternative shares.
The hard numbers
As mentioned earlier, the research HUB4 has conducted with Milliman suggests making such functionality available on platforms can provide substantial improvements to investment performance and tax outcomes.
Examples in the research paper quantify these benefits and I will take you through a few mentioned in the paper – a closed fund and shares reaching a target price.
In the first example, a portfolio manager holds a managed fund in a portfolio which hard closes to new client funds. By using PPI available on HUB24, the portfolio manager can retain existing invested funds in the hard-closed managed fund while allocating new client funds to a new alternative managed fund within the managed portfolio.
Based on the modelling in the white paper, this meant a client saved $7,240 in CGT (47 per cent tax rate) or $2,310 (15 per cent tax rate) on $100,000 because they did not have to switch out of the closed fund and trigger CGT.
Another example is when shares reach a target price. Here a portfolio manager can use PPI to give greater flexibility to keep existing client funds invested while new client funds are allocated to an alternative asset.
Based on the modelling in the white paper, investing new client funds in an alternative portfolio delivered better performance than if they were invested in the current portfolio. In the example the enhanced performance generated $4,681 on a $100,000 investment portfolio of funds.
Multiplying effect of value
While the research findings are impressive, there is also the potential to have a compounding effect when these scenarios play out multiple times during the lifetime of a client’s portfolio, potentially resulting in significant benefits for clients.
Further, these benefits are in isolation of other benefits available on platforms including those gained via managed portfolios and tax optimisation.
Brett Mennie, head of managed portfolios, HUB24
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