The year to 30 June 2023 saw a continuance of the divergence between economic conditions and financial market performance. Investors were reminded that financial market impacts can often precede a worsening economic environment by periods that can span many months, with sharemarkets globally experiencing significant positive returns for the year.
Locally, the S&P/ASX 200 index returned 14.78% for the financial year while globally, the MSCI World Ex Australia Index was much stronger spurned by a well performing technology sector, posting a 22.59% return (unhedged) on a pre-tax basis. The RBA raised the official cash rate by 3.25% over the year, finishing the year at 4.1%. This was the fastest and most aggressive rise in interest rates since 1988, driven by the need to help curb inflation.
Pleasingly, in this strong financial market environment, over 50% of the Tax Optimised investment series were in a net tax receivable position for the year. The remaining Tax Optimised investment options on average paid less than 0.50% on fund value in tax, resulting in a strong post-tax return position for the year.
The key driver for this tax efficiency was systematic rebalancing within the investment portfolios which reduced the taxable earnings - lowering the overall tax impact on returns. The sharp increase in interest rates and additional volatility in the fixed interest asset class created tax alpha opportunities for the diversified funds in particular.
With up to 3.28% in additional tax alpha generated during the last twelve months across the Tax Optimised series of investment options, these investment options will benefit from having more capital available to invest going forward. To highlight what this means over the longer term, a 1.5% increase in annualised return* (as a result of more capital being available to invest) over a ten-year period into a MSCI World Ex Australia Index fund would have added a further 43% cumulative value for an investor over the last ten years to 30 June.
The power of compounding tax alpha over time without increasing investment risk enables more of the headline investment strategy return to be delivered back to investors.
* Illustrative return assuming an additional improvement in after-tax returns over a 10-year period. This is not a forecast or projection of after-tax returns to be achieved.