Suits you sir: tax moves centre-stage for asset managers
02 June 2017
PwC’s Asset Management Tax conference, held in London on 9 May, saw delegates focus on product choice and suitability in an industry that has become increasingly polarised.
As PwC’s Asset Management 2020 series has charted, the asset management sector is polarising: on one side sit global mega managers which participate in a broad range of asset classes and markets; on the other are the boutique managers looking to focus on specialist mandates. Pressure on fees, particularly as passive funds continue to dominate their active counterparts, and the cost of the regulatory burden will continue to drive this split, but the clients of both types of manager are becoming more demanding; they want asset management products tailored to their specific needs and circumstances, even on tax.
What does that mean for product providers? Well, given that asset managers must find economies of scale, pooled vehicles are likely to remain popular; indeed, some jurisdictions are now launching new types of pooled product for local investors. Equally, larger and more sophisticated investors will continue to look for a tailored approach through segregated mandates – particularly in the alternatives and multi-asset spaces.
Either way, asset managers are going to have to think about tax efficiency. An analysis of the different ways in which a UK pension fund might get exposure to world, European and US equity strategies reveals that the tax impact of different fund structures is often far more significant than has been realised. In some circumstances, investing through a tax-transparent fund could see a return that is 60 basis points a year higher than buying the same assets via a non-transparent structure.
This is value that investors simply cannot afford to leave on the table; asset managers that are unable to offer the most appropriate structures to different investors, from pension schemes to sovereign wealth funds, may therefore find themselves shunned, especially by larger clients with the purchasing power to get what they want elsewhere.
Not that accommodating such needs will be straightforward, since investors’ circumstances are so variable – multiple share classes and fund structures may be needed to meet clients’ demands, undermining asset managers’ quest for economies of scale.
Moreover, asset managers will at the same time have to cope with other demands – in particular, the inexorable rise of exchange traded funds (ETFs), whose simplicity and transparency continue to attract enormous asset flows. So much so that even avowedly active managers are now coming under pressure to add passive ETFs to their product suites.
Then there is the continuing push into alternatives – property, infrastructure and debt funds, for example – as investors look for yield. The rise of multi-asset mandates and smart beta funds provides further food for thought, while some asset managers believe active ETFs will capture growing market share.
Against this challenging backdrop, asset managers keen to minimise tax leakage must also contend with goalposts that are on the move. Not least, cross-border tax initiatives such as the BEPS regulation, have begun to impact the sector, diminishing the attractions, for example of offshore-based UK property funds and funds using hybrid instruments.
The UK’s departure from the European Union is another potential impact. Brexit may lead to tax changes at the investment level for many funds, as well as forcing investors to reconsider the vehicles they use for exposure to particular assets and markets. Unless the UK is able to reach some sort of equivalence deal with the EU during the Brexit negotiations, we will increasingly see numerous parallel fund ranges set up to attract UK and EU investors.
You might call it the curse of living in interesting times. In a market environment where asset managers would like to be able to simplify, they must actually find a way to deliver greater product choice, focusing on suitability for myriad groups of investors. Tax, moreover, has for the first time become an intrinsic part of the suitability equation.
If you would like to discuss how PwC can help your firm respond to these challenges, please contact us:
In next week’s post conference article, Elizabeth Stone and Lachlan Roos will discuss the increasing pressures on asset managers in response to tax and regulatory requirements and the consequent evolution of the tax function in a modern asset management firm.