Simplicity dumps Vanguard in tax-spillage clean-up, follows InvestNow model
Article written by InvestNow – 27th April 2023
Passive investment firm, Simplicity, has replaced Vanguard as its offshore assets manager in a move set to fix a well-documented tax problem that similar InvestNow funds were designed to avoid.
Under the news announced last week, Simplicity will swap several Vanguard Australian unit trusts (AUTs) for some New Zealand-based portfolio investment entity funds managed by the German firm, DWS.
The Deutsche Bank-owned DWS is not well known in NZ but manages about US$1.4 trillion globally including a large chunk of index-linked assets.
Simplicity has used Vanguard’s AUTs to run its offshore shares and fixed income assets since inception in 2016 but – as a previous InvestNow article points out – the fund structure can result in substantial ‘tax-spillage’ for NZ investors.
In a release, Simplicity admits that: “New Zealand-domiciled funds are more tax-efficient because income earned on their overseas investments is subject to withholding tax at New Zealand tax treaty rates, optimising the amount of overseas withholding tax paid on this income.”
While Simplicity elected to keep offering investors tax-inefficient products for more than six years, the low-cost Foundation Series Balanced and Growth Funds – that include similar passive global equities exposures – were built from scratch with a NZ-domiciled structure to minimise any such leakage. These Foundation Series Funds have proved popular with clients, especially within the InvestNow KiwiSaver Scheme.
Jason Choy, the Foundation Series Funds’ portfolio manager, says the Simplicity decision to replace Vanguard AUTs with NZ-based funds proves the importance of tax-efficiency in building investment products.
“We created the Foundation Series Funds from the ground-up with both tax- and cost-efficiencies in mind to maximise the long-term returns for investors,” Choy says. “While establishing NZ-domiciled funds incurs some expense to start with, the benefits for investors matter more.
“It’s difficult to understand why Simplicity took so long to come to the same conclusion.”
The tax-slippage impact varies over time but NZ investors may lose about 0.2% to 0.3% each year for poorly constructed global equities products, for example.
In dollar terms that small percentage can rapidly add up.
Simplicity says if it stayed with the Vanguard AUTs, members would lose “an estimated $4-7 million on aggregate per year” compared to shifting to the new DWS portfolios.
“By extension, Simplicity members likely missed out on many millions more in returns over the last six years through tax inefficiencies,” Choy says. “We’re pleased that the manager has followed the example set by the Foundation Series Funds and – belatedly – done the right thing by its members.”
Simplicity dumps Vanguard in tax-spillage clean-up, follows InvestNow model
Article written by InvestNow – 27th April 2023
Passive investment firm, Simplicity, has replaced Vanguard as its offshore assets manager in a move set to fix a well-documented tax problem that similar InvestNow funds were designed to avoid.
Under the news announced last week, Simplicity will swap several Vanguard Australian unit trusts (AUTs) for some New Zealand-based portfolio investment entity funds managed by the German firm, DWS.
The Deutsche Bank-owned DWS is not well known in NZ but manages about US$1.4 trillion globally including a large chunk of index-linked assets.
Simplicity has used Vanguard’s AUTs to run its offshore shares and fixed income assets since inception in 2016 but – as a previous InvestNow article points out – the fund structure can result in substantial ‘tax-spillage’ for NZ investors.
In a release, Simplicity admits that: “New Zealand-domiciled funds are more tax-efficient because income earned on their overseas investments is subject to withholding tax at New Zealand tax treaty rates, optimising the amount of overseas withholding tax paid on this income.”
While Simplicity elected to keep offering investors tax-inefficient products for more than six years, the low-cost Foundation Series Balanced and Growth Funds – that include similar passive global equities exposures – were built from scratch with a NZ-domiciled structure to minimise any such leakage. These Foundation Series Funds have proved popular with clients, especially within the InvestNow KiwiSaver Scheme.
Jason Choy, the Foundation Series Funds’ portfolio manager, says the Simplicity decision to replace Vanguard AUTs with NZ-based funds proves the importance of tax-efficiency in building investment products.
“We created the Foundation Series Funds from the ground-up with both tax- and cost-efficiencies in mind to maximise the long-term returns for investors,” Choy says. “While establishing NZ-domiciled funds incurs some expense to start with, the benefits for investors matter more.
“It’s difficult to understand why Simplicity took so long to come to the same conclusion.”
The tax-slippage impact varies over time but NZ investors may lose about 0.2% to 0.3% each year for poorly constructed global equities products, for example.
In dollar terms that small percentage can rapidly add up.
Simplicity says if it stayed with the Vanguard AUTs, members would lose “an estimated $4-7 million on aggregate per year” compared to shifting to the new DWS portfolios.
“By extension, Simplicity members likely missed out on many millions more in returns over the last six years through tax inefficiencies,” Choy says. “We’re pleased that the manager has followed the example set by the Foundation Series Funds and – belatedly – done the right thing by its members.”
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