centralised portfolio management · after-tax returns were calculated on a pre-liquidation basis...

For Use in One-On-One Presentations to Institutional Investors Only Parametric Portfolio Associates LLC Eaton Vance Management (International) Ltd.

November 2012

Centralised Portfolio Management

Managing Equity Portfolios for After-Tax Returns

Parametric Portfolio Associates LLC

Eaton Vance Management (International) Ltd.

Presentation Summary

• CPM can add material value to net performance - after taxes, transaction costs and fees.

• Taxes are important and the impact of taxes can be managed.

• CPM is more than tax-management.

• CPM exploits a separation of alpha creation (artisan) from portfolio construction (engineering).

2 Parametric Portfolio Associates LLC


Traditional Fund Structure

Fund Structure with CPM Manager

ACCOUNT 2 ACCOUNT 1 ACCOUNT 3 ACCOUNT 4

25% Manager B 20% Manager C 20% Manager D 35% Manager A

Fund

TRADES

Fund

25% Manager B 20% Manager C 20% Manager D 35% Manager A

Centralised Portfolio Manager

CPM – Centralised Portfolio Management



After-Tax Investing – Trustee Responsibilities

Trustee Obligations and Prudential Standards Bill 2012 As passed by both Houses

Schedule 1 – Trustee Obligations

SIS Act 1993

Division 6 — Trustee obligations relating to MySuper

29VN Each trustee of a regulated superannuation fund that includes a MySuper product must:

(a) promote the financial interests of the beneficiaries of the fund who hold the MySuper product, in particular returns to those beneficiaries (after the deduction of fees, costs and taxes);

Division 7 – Offences

52 Covenants to be included in governing rules—registrable superannuation entities

Investment covenants

(6) The covenants referred to in subsection (1) include the following covenants by each trustee of the entity:

(a) to formulate, review regularly and give effect to an investment strategy for the whole of the entity, and for each investment option offered by the trustee in the entity, having regard to:

(vi) the expected tax consequences for the entity in relation to the investments covered by the strategy;



Source: Parametric, Morningstar mutual fund database. 223 active international managers with a 10-year track record, excluding retail funds. “Tax Impact (% pa)” is reduction of return due to realised taxes. After-tax returns were calculated on a pre-liquidation basis and assume a 15% tax rate on income and capital gains.

120 Months Ending 30 September 2012

An example, using International and World Stock funds, illustrates how after-tax return can vary substantially

across managers and strategies.

Investment Tax Bite is Not Uniform

5

-6

-4

-2

0

2

4

6

-1.10 -0.90 -0.70 -0.50 -0.30 -0.10

Tax Impact (% pa)

10 Year Horizon Before Tax Excess Returns (% pa)



Taxes Vary by Investment Style

6

Source: Parametric, Morningstar mutual fund database. 223 active international managers with a 10-year track record, excluding retail funds. “Tax Impact (% pa)” is reduction of return due to

realised taxes. After-tax returns were calculated on a pre-liquidation basis and assume a 15% tax rate on income and capital gains.

120 Months Ending 30 September 2012

Observations

‒ Over a ten-year period, the average excess return for

international managers is largely erased by the tax

impact of trading.

‒ Average excess return is 0.51%

‒ Average tax impact is -0.50%

‒ Strategies with a strong sell discipline (like value and

small cap) tend to be less tax efficient.

‒ Strategies that let the winners run (like growth and

passive) tend to be more tax efficient.

‒ Careful tax management during implementation can

improve the tax efficiency of all investment styles.

Avg. Excess Return Avg. Tax Impact

# Funds 1 Year 5 Year 10 Year 1 Year 5 Year 10 Year

Passive (EFA) 1 - - - (0.26) (0.20) (0.26)

All Funds 223 1.83 1.23 0.51 (0.40) (0.43) (0.50)

Foreign Large Blend 101 1.16 0.64 0.32 (0.43) (0.47) (0.52)

Foreign Large Growth 26 2.85 1.72 1.36 (0.25) (0.34) (0.34)

Foreign Large Value 43 (1.76) (0.02) 0.67 (0.54) (0.60) (0.57)

World Stock 53 5.52 3.12 0.32 (0.32) (0.28) (0.46)

(0.70)

(0.60)

(0.50)

(0.40)

(0.30)

(0.20)

(0.10)

-

Passive (EFA) All Funds Foreign LargeBlend

Foreign LargeGrowth

Foreign LargeValue

World Stock1

10 Year Avg. Ann. Tax Impact (% pa)



Baseline

• Tight tracking to targeted allocation

• Allocation/manager changes

• Management of investment restrictions

• Rebalancing

• Systematic withdrawals

• Centralised risk control

Tax-Managed

• Transition of pre-existing securities

• Tax-efficient implementation of manager decisions

• Short-term gain deferral

• Tax-efficient allocation/manager changes

• Tax-efficient cash flow management

• After-tax performance reporting for individual managers and the aggregate

How Does CPM Work?



Tax Management Activities

Traditional “tax-aware” investing:

• Choice of accounting method: High Cost and Max Loss tax parcel selection methods will likely result in lower tax liability

• Yield consideration: Paying attention to franking credits can improve after-tax performance.

• Consideration of corporate actions: Some actions, like share buy-backs, can have significant tax benefits

Active tax-management:

The dominant objective a CPM active tax-management strategy is to track the manager mix within risk bounds, with a secondary

objective of maximising after-tax returns through the management of CGT.

• All the features of traditional “tax-aware” management

• Paying attention to transitions: Hiring and firing managers, withdrawals

• Manage the holding period: Reduce the tax rates on capital gains by holding longer than 12 months

• Increased turnover: All turnover is not created equal. Turnover that serves to reduce tax liability improves after-tax results

• Defer the realisation of gains: Strategically delay unnecessary tax payments

• Measure after-tax returns: After-tax performance measurement is included along with an after-tax performance benchmark



Tax Alpha Simulations: Tax-Managed CPM

Source: Parametric 9

Active Tracking, 50% Turnover, Superannuation Rates

No Cash Flow Tax Alpha (bps) TE T/O

Market Total Return -4% 0% 4% 8%

Tax Rate: 10%/15% 44 42 45 49 <1.0% 50-75%

Tax rate: 10% 12 15 19 24 <1.0% 75-100%

Cash In-Flow, 10%/yr Tax Alpha (bps) TE T/O


Tax Rate: 10%/15% 54 53 53 58 <1.0% 50-75%

Tax rate: 10% 20 22 24 29 <1.0% 75-100%

Cash Out-Flow, 10%/yr Tax Alpha (bps) TE T/O


Tax Rate: 10%/15% 16 21 25 30 <1.0% 75-100%

Tax rate: 10% -- -- -- 6 <1.0% 75-100%

Base Simulation Parameters

Universe: ASX 200-like universe

• Stock volatility: 25%

• Dividend Return: 3.8%, 75% franked

• Years: 10

• Rebalancing frequency: bi-monthly

• Pre-liquidation



Conclusions

• MySuper makes managing for after-tax returns a trustee obligation for superannuation funds

• The traditional multi-manager portfolio structure is inherently tax-inefficient

• Co-ordination across the multi-manager portfolio is necessary to achieve real tax-efficiencies

• Centralised portfolio management is a well-established and proven technique in the US

• Australia has previously seen different models of CPM/Emulation, but not incorporating genuine tax-management

• A fully realised CPM effort extends investor benefits to and across:

— Taxes

— Transaction costs

— Portfolio structure - alpha/beta separation

— Rebalancing

— Macro-fund policy management

— ESG/SRI and other compliance



Disclaimer

11

This material is presented and issued by Parametric Portfolio Associates LLC (“Parametric”) and Eaton Vance Management (International) Limited (“EVMI”).

Parametric is regulated by the United States Securities and Exchange Commission as a registered investment adviser and is located at 1918 Eighth Avenue

Suite 3100, Seattle, Washington 98101. EVMI is authorised and regulated by the Financial Services Authority in the United Kingdom and is located at 125

Old Broad Street, London, EC2N 1AR, United Kingdom.

Parametric and EVMI are exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of the provision

of financial services to wholesale clients as defined in the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission's (ASIC)

Class Orders 2003/1100 and 2003/1099, respectively. Parametric is registered as an investment adviser with the United States Securities and Exchange

Commission, whose rules and regulations may differ from Australian law. EVMI is regulated by the Financial Services Authority under the laws of the United

Kingdom, which differ from Australian laws.

Parametric is a majority-owned subsidiary of Eaton Vance Corp. (“EVC”). EVMI is a wholly owned subsidiary of Eaton Vance Management (“EVM”). EVM is

an investment adviser also registered with the United States Securities and Exchange Commission (“SEC“) and is a wholly owned subsidiary of EVC. The

non-voting common stock of EVC is publicly traded on the NYSE under the symbol “EV”. For purposes of this presentation, references to “Eaton Vance

Management”, “Eaton Vance Management (International) Limited” or the “Firm” is defined as all three entities operating under the Eaton Vance brand.

The information in this presentation should not be considered investment advice, a recommendation to buy or sell any particular security or tax advice. The

information in this presentation does not constitute an offer to sell or solicitation of an offer to anyone in any jurisdiction to buy investments and/or the Eaton

Vance funds, and products and services offered by Parametric and Eaton Vance are only available to residents of countries where offers of such products

and services are permitted by law. This presentation is for the benefit of persons to whom Parametric and Eaton Vance reasonably believe they are

permitted to communicate this information, and this presentation should not be forwarded to any other person without the consent of Parametric and Eaton

Vance. This presentation is not addressed to any other person and may not be used by another person for any purpose whatsoever. Neither Parametric nor

Eaton Vance hereby express a view as to the suitability of the investments described herein to the individual circumstances of any recipient or otherwise. It

is the responsibility of every person attending this presentation and reading this document to satisfy himself as to the full observance of the laws of any

relevant country, including obtaining any governmental or other consent which may be required or observing any other formality which needs to be observed

in that country.

Unless otherwise stated, returns and market values contained herein are presented in U.S. Dollars. After-tax performance calculations are based upon

Parametric’s best information concerning dividend and capital gain realisation. Information on tax and returns is provided for illustrative purposes only

without knowledge of an individual investor’s tax or financial objectives, needs and circumstances. Investor’s should consult their own tax or financial

advisers for detailed advice on their particular situation.

(continued on the next page) Parametric Portfolio Associates LLC


Disclaimer (Continued)

12

Investing entails risks and there can be no assurance that Parametric or Eaton Vance will achieve profits or avoid incurring losses. Accordingly, before

acting on any of the information, investors should obtain their own tax and financial advice.

EVMI utilises a third party organisation in Australia, Allen, Allen & Partners, to promote the investment capabilities of Eaton Vance Investment Managers to

institutional investors. For these services Allen, Allen & Partners is paid a fee by EVMI based upon the asset values of clients that Eaton Vance provides

investment advice to following these introductions.



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