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AIC calls for after-tax disclosure

Rankings can change, fund firm notes


TORONTO -- Mutual fund companies are good at letting investors know how their performance stacks up before taxes are taken out, but AIC Ltd. is calling for its rivals to post their after-tax returns as well.

The amount of money investors keep in their pockets after Ottawa takes its cut matters most, argues Burlington, Ont.-based AIC.

The fund company noted in a presentation yesterday that U.S. regulators already require mutual fund companies in the United States to disclose after-tax returns.

Furthermore, one fund's ranking compared with others in the industry can change significantly when after-tax returns are taken into account, says AIC, which sponsored a study by Moshe Milevsky, professor of finance at the Schulich School of Business at York University.

"Taxes scramble rankings," Prof. Milevsky said.

Prof. Milevsky's research team examined 10 years of historical rates of return from 343 equity and balanced mutual funds managed by Canadian companies, to assess the impact of personal income taxes on the funds' relative performance and rankings.

Not surprisingly, the results showed that AIC was one of the companies whose fund rankings improved when returns were measured after taxes.

AIC has long emphasized a more tax-efficient, buy-and-hold strategy in its mutual funds. The funds tend to hold stocks for the long term and thereby minimize distributions that could be taxable.

The AIC Advantage Fund, for example, had a pretax return of 18.5 per cent and a number four ranking. The same fund's return after realizing gains and paying taxes on them would be 15.9 per cent, to push the fund's ranking to second.

"If we are in an environment of permanently lower investment returns -- as many experts are now predicting -- then tax awareness and efficiency becomes more important as one of the ways in which advisers can add value relative to their competition," Prof. Milevsky said.

AIC's managing director of national tax services, Tim Cestnick, suggested that mutual fund holders contact fund companies and ask them to disclose after-tax returns.

Mr. Cestnick pointed out that U.S. regulators have required mutual funds in the United States to report their returns on both a pretax and after-tax basis since April 1, 2001.

Mr. Cestnick said the issue is more crucial for investors who hold investments outside of a registered retirement savings plan, because they are losing returns. No taxes are payable on distributions or gains that are sheltered by an RRSP.

He noted that an increasing number of investors are holding assets outside of an RRSP.

Jamie Golombek, vice-president of taxation and estate planning for AIM Funds Management Inc., said he would be "strongly opposed" to any regulation requiring disclosure of after-tax returns.

Mr. Golombek notes that approximately half of Canadians who hold mutual funds do so within an RRSP, which means the after-tax return would be irrelevant to them.

He said the industry would also face increased costs and extended wrangling over tax rates, which vary by income and province.

Jim Hunter, president and chief executive officer of Mackenzie Financial Corp., said he would welcome regulations requiring funds to disclose their after-tax returns.

Mr. Hunter said most innovative fund companies are looking for strategies that make investing more tax-efficient and they are therefore focused on after-tax returns.

"We would be happy if this information was made mandatory."

Dan Hallett, an analyst at Sterling Mutuals Inc., also believes the after-tax data would be helpful to investors.

"It is important for money managers to be sensitive to tax issues."

But he added that he would be uncomfortable with an investing style that let tax considerations outweigh normal investing decisions.

© 2007 The Globe and Mail. All rights reserved.

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