Any Fund Managers out there????
Discussion
Ok, I have a Fund at work that I deal with. There's a Life fund and a Pension fund, in which the asset allocations are identical (i.e. it's the exact same fund, apart from different tax treatments). The fund is made up of the usual stuff - UK equities, property, gilts, bonds, etc.
When comparing the year on year growth, the Pension fund always does slightly better due to the tax treatment. (i.e. Life Fund +11.3% Growth and Pension Fund 12.7% Growth)
However, in 2008 the Life fund lost -11.26% but the Pension Fund lost even more at -12.83%. My question is, how is this so? Surely a TAX EFFICIENT Pension fund should ALWAYS outperform the equivalent Life Fund?
I'm trying to get a 'laymans' answer from technical, but I keep getting different answers. So any replies please keep simple!
When comparing the year on year growth, the Pension fund always does slightly better due to the tax treatment. (i.e. Life Fund +11.3% Growth and Pension Fund 12.7% Growth)
However, in 2008 the Life fund lost -11.26% but the Pension Fund lost even more at -12.83%. My question is, how is this so? Surely a TAX EFFICIENT Pension fund should ALWAYS outperform the equivalent Life Fund?
I'm trying to get a 'laymans' answer from technical, but I keep getting different answers. So any replies please keep simple!
Edited by audi321 on Friday 5th March 19:31
Might be something to do with the tax treatment of dividends....pension funds do pay tax on them and maybe it's more than Life funds. Pension funds tax advantage is only on CGT.
You don't say where you work but surely someone would be happy to explain it to you ? If they aren't it's probably because they don't know themselves!
You don't say where you work but surely someone would be happy to explain it to you ? If they aren't it's probably because they don't know themselves!
It is probably something as simple as the fund liquidity. There is a possibility that during 2008 there were transfers out of the pension fund to another provider (someone leaving as an example and taking their portion with them). This would mean that the managers would have to sell some of their holdings to be able to make the transfer if there was insufficient cash in the fund. That would then crystalise the loses on those shares that were sold and reduce the net dividends coming into the fund.
Beardy10 said:
You don't say where you work but surely someone would be happy to explain it to you ? If they aren't it's probably because they don't know themselves!
I have asked the fund manager, who bleated on for 10 minutes, half of which I couldn't understand, but his answer revolved around the tax saving working in opposite when the fund goes down (I can't grasp that explaination though!)The Life Fund and Pension Fund are identical in every way, so I can't see it being transfers, and if this were the case, why in every other 'positive growth' year does the Pension Fund outperform by say 1-2%?
Mr M, you are alive then, i'd given up hope!
Couple of points to muddy the waters on this one my friend.
Firstly the asset allocation does not reflect the underlying stock holdings which could be very different between the two funds. The funds will have differing bench marks, for example, in terms of peer group, and all FMs are trying to beat the benchmark and peer group. For example, 20% Fixed Interest, could be all Gilts or could be Corporates and High Yield debt, very different beasts, but same asset allocation.
On the tax side the life fund is taxed internally on the varying assets at their varying basic income tax rates i.e. 10% on dividends, 20% on interest/rental etc. While the only income tax in the pension is the 10% on dividends. Both are CGT free.
Therefore, in a falling market tax should not really have much of an impact, as descibed, as the income streams in both cases should not be largely affected (market falls hitting capital values not dividend stream/interest changes impacting on gilt prices not their coupon for example), if the holdings were identical, and CGT is no issue. If anything the tax is still on the side of the pension fund.
The other issue not discussed are charges, and I'm not talking about the amc that joe public gets told about, look at the total expense ratios between the funds. My guess is because of the, alleged, extra work, that you'll find more costs in the pension fund. When markets head north, the tax savings mask this, but not when going the other way.
On a more interesting point are you doing Malton run at easter?
Couple of points to muddy the waters on this one my friend.
Firstly the asset allocation does not reflect the underlying stock holdings which could be very different between the two funds. The funds will have differing bench marks, for example, in terms of peer group, and all FMs are trying to beat the benchmark and peer group. For example, 20% Fixed Interest, could be all Gilts or could be Corporates and High Yield debt, very different beasts, but same asset allocation.
On the tax side the life fund is taxed internally on the varying assets at their varying basic income tax rates i.e. 10% on dividends, 20% on interest/rental etc. While the only income tax in the pension is the 10% on dividends. Both are CGT free.
Therefore, in a falling market tax should not really have much of an impact, as descibed, as the income streams in both cases should not be largely affected (market falls hitting capital values not dividend stream/interest changes impacting on gilt prices not their coupon for example), if the holdings were identical, and CGT is no issue. If anything the tax is still on the side of the pension fund.
The other issue not discussed are charges, and I'm not talking about the amc that joe public gets told about, look at the total expense ratios between the funds. My guess is because of the, alleged, extra work, that you'll find more costs in the pension fund. When markets head north, the tax savings mask this, but not when going the other way.
On a more interesting point are you doing Malton run at easter?
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