Simplicity is poised to dump Vanguard as its core underlying manager to seal a long-known tax leak in the offshore-domiciled funds.
In a social media post last week, a Simplicity representative confirmed the mostly passive manager was “steadily working towards a solution for our international assets”.
“We have a number of billions of dollars invested, so we are moving cautiously as you would expect,” the social media post says.
“I expect to have made significant progress by the end of September. Our intention is to complete the change this calendar year if possible; certainly by the end of our financial year – 31 March 2023. Sorry I am not able to be more specific.”
However, Vanguard would not be an option for Simplicity given the global index investment behemoth exited the institutional mandate market in Australia and NZ ahead of a planned move into the retail superannuation game.
Vanguard Australia received a superannuation licence late in August, slating a super product launch before year-end.
In a shock move late in 2020, Vanguard gave notice it would close all Australasian institutional mandates within two years, triggering a flight to new providers on both sides of the Tasman including a $5 billion plus shift to Northern Trust by ANZ in NZ.
Aside from Northern Trust, potential Vanguard replacements including State Street Global Advisors and BlackRock, which have secured significant mandates from KiwiSaver providers and others in NZ. BlackRock, for example, manages – or influences – about $30 billion on behalf of ASB and AMP alone.
Since inception as a KiwiSaver provider in 2016, Simplicity, headed by Sam Stubbs, has invested global assets in Vanguard Australian unit trusts, which have a well-documented tax problem for NZ investors.
“It is true that tax leakage is impacting our diversified funds due to investing in Australian domiciled Vanguard funds. The calculation of the impact of tax leakage is quite complex and changes rapidly…,” the Simplicity social media note says.
Unlike in local-based portfolio investment entity (PIE) vehicles, NZ investors can’t claim back non-resident withholding tax (typically, about 15 per cent) deducted from global share dividend income incurred in Australian unit trusts.
Based on the current dividend yield of the global stock index of about 1.9 per cent, that would seen ‘tax slippage’ of about 0.15 per cent in the Simplicity growth fund, which has roughly 53 per cent invested in offshore equities.
Other inefficiencies in offshore-based funds could see the effective leakage pushed higher, especially for those in the top tax bracket.
Despite the tax disadvantages of using Australian unit trusts for global assets, Simplicity has stuck with the model until now citing cost pressures of moving to a locally domiciled mandate structure.
“Before we reached the scale we are now the investment products available to us at the time were prohibitively expensive,” the social media note says.
Simplicity last reported about $4.4 billion under management across its suite of KiwiSaver and investment funds.