A sting in the transition tail
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The sophisticated world of large superannuation fund investing demonstrates an age-old aphorism: the only constant is change.  Funds initiate some changed themselves to implement new ideas, address risks in the portfolio (including peer risk), insource or add transparency.  Some changes are driven by shifting member preferences, such as adding yield-focused investment strategies for retired members or screening out investments that are not consistent with members' values.

Some changed are driven by regulations, such as merging with other funds and rationalizing investments, reducing fees and indirect costs or preparing to fund the per-member hardship drawdown entitlements recently enacted in response to the current pandemic crisis.  As this  crisis reminds us, dynamic and hostile investment markets impose their own pressures on existing investment settings.  So it is business as usual (BAU) for funds to regularly tailor their investment portfolios to adjust their liquidity, asset allocation, investment strategy mix and hedging and overlay settings.

Many BAU investment changed require careful transition management from a superannuation fund's existing set of portfolio exposures to a new target set of exposures.  Funds typically use specialist managers due to the risk and complexity of transition management.  Yes most transition managers - and funds themselves - have a blind sport around one cost of transitions: tax.

We work through a hypothetical equity transition scenario to investigate this blind spot and discover a typically ignored tax sting in our transition tail more than six times larger than the always addressed impact of transaction costs, which hardly seems logical.

Fortunately, superannuation funds can apply there after-tax change management insights in the complex real world in which they invest through an implementation solution known as 'centralized portfolio management' (CPM).  We offer a real-life case study of a recent transition conducted in CPM, which delivered a new portfolio to a superannuation fund with approximately one-quarter of the turnover and realized gains compared with traditional transition management.  We are that embracing implementation efficiency as a key investment principle is essential to how funds respond to the BAU reality of their change environment.  Otherwise, too much of the value of their good investment ideas could be eroded by the real-world costs of implementing them, including tax.

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