Simplicity switches out Vanguard for tax gain

Simplicity is switching management of more than $3 billion of international investments from Vanguard unit trusts to separate portfolios managed by German fund manager DWS International (DWS).

Thursday, April 27th 2023, 6:00AM

by Andrea Malcolm

DWS, which is majority owned by Deutsch Bank, is listed on the Frankfurt Stock Exchange and manages more than $1.4 trillion ($911 billion in active funds and $269 billion in passive funds) globally.

Simplicity managing director Sam Stubbs says with $4.8 billion in assets under management, Simplicity now has the scale to establish new international investment portfolios to be domiciled in New Zealand.

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. Stubbs estimates the gains will be around 0.3% which is the same as its management fee for shares and funds.

Research puts the long term tax drag for an investor on the top marginal tax rate investing in Australian equities at 0.8% to 2.3% per annum.

Simplicity estimates that based on current funds under management, the change could boost returns for its members by an estimated $4-7 million on aggregate per year versus remaining with Vanguard.

“Beforehand we were too small in the sense that the money saved in tax credits would have been paid as extra costs by establishing our own funds domestically and appointing a manager. It wasn't cost efficient to do that, it wasn't in our members’ best interests.”

Stubbs describes parting with Vanguard as amicable with Vanguard’s low-fee passive approach being the inspiration to start Simplicity to begin with. “We wanted to stay with them, we offered but they’ve made the corporate decision that they want to get into retail funds themselves and don’t want to be managing funds like ours. So they declined to do so.”

Vanguard began its exit from managing third party funds in New Zealand in 2020, when it left major investors ANZ, ASB and BNZ in the lurch.

Stubbs says Simplicity chose German investment manager DWS because of its size, experience and the price was right. DWS is probably most well known for being raided by the police last year as part of an ongoing greenwashing investigation after a whistleblower claimed it had misrepresented its ESG credentials. DWS has had an internal inquiry into its ESG practices and made changes since the whistleblower incident.

Stubbs says Simplicity and DWS had “lengthy discussions” about the matter. He says other asset managers have been sanctioned on ESG claims. Last year Goldman Sachs Asset Management and BNY Mellon’s investment arm both received multimillion dollar finds from the US Securities and Exchange commission.

“They’re no better or worse than anyone else. In this case there was a single whistleblower so it made for headlines. It is still under investigation but the substance behind the headlines is that it seems unlikely that DWS will be censured or significantly fined.

The new overseas portfolios will use customised Bloomberg indices set up to reflect Simplicity's ethical investment principles, and will be implemented in early May.

Stubbs says Bloomberg was chosen because they offered a competitive price.

Tags: Simplicity