Higher rates and tougher tax rules have triggered a spike in interest from investors and financial advisers in managed cash portfolio investment entity (PIE) funds.
Stuart Williams, Nikko managing director, said the $8 billion investment firm had seen a flurry of activity from financial planner groups, retail investors and institutions seeking more tax-effective returns from cash portfolios.
Williams said the recently announced increase in the trust tax rate to 39 per cent from the previous 33 per cent would only intensify the shift from term deposits (TDs) and the like to managed PIE cash vehicles.
“Investors are realising that the impact of the widening of this tax rate gap on net returns will be felt both immediately and exponentially over time, and we have seen an increase in enquiries into the benefits of investing via the PIE investment vehicles versus investing via directly-held assets,” he said in a statement.
While the trust tax hike is due to take effect next April, Williams said the news illustrated the value of tax-efficient PIE cash managed funds for those on higher marginal rates.
For instance, a Nikko analysis shows top-rate investors would be about 15 per cent better-off in relative terms by investing in a managed cash PIE compared to a TD paying the same headline return at current rates.
Currently, the Nikko cash fund offers a yield of about 6 per cent, equating to a return of 4.32 per cent (before fees) for those on the top PIE rate of 28 per cent: the net return on a 6 per cent term deposit drops to just 3.66 per cent after applying a 39 per cent tax rate.
Nikko has about $3 billion in its cash strategy including $800 million held via the PIE fund (the remainder is institutional mandates).
Similarly, Anthony Edmonds, head of FundRock NZ (previously, Implemented Investment Solutions), said the impending trust tax hike had seen a deluge of flows to managed fund cash PIEs on the InvestNow platform as well as a knock-on effect for fixed income assets.
Edmonds said the trust tax increase further emphasised the poor efficiency of direct bond portfolios for high-marginal-rate investors, opening up the way for a significant reallocation to global fixed interest PIEs.
“We’ve seen a step-change in queries from offshore managers looking to launch fixed income PIEs in the wake of the trust tax change announcement,” he said.
“With interest rates now over 5 per cent, investors on 39 per cent marginal rates get more than half a percent extra after tax by using PIE funds. It would be hard to justify recommending direct assets to someone on a 39 per cent tax, as the PIE tax benefits are simply too great to ignore.”
Managed cash PIE funds invest in similar underlying assets as TDs but, unlike the locked-in bank deposits, offer more frequent, typically daily, liquidity.