Third party funds’ tax costs are never far from Latin American investors’ minds. We asked two fund selectors from Chile how their tax regime impacts their process and if it makes them more stringent on fund fees.
Pablo Saffer Vergara
Chile has introduced regulation that affects the profitability investors receive from different products, which has made things quite challenging. For example, investments in local products are now exempt from capital gains tax, so many investors are now considering transferring their international investments to the local industry. In this context, it has been difficult for us to find international asset managers to partner with to build a local feeder of their funds. We have already done this with some specific products, but there is potential for more.
There are three sources of tax collection in Chile covering investments in international funds: a tax on capital gains; a tax on dividends when investing in products domiciled in the US (‘withholding tax of 30%’); and finally a tax on changes in the exchange rate (‘monetary correction’) charged annually.
A further level of complication is that tax treatment depends on the type of investor (natural or legal person), the amount invested and the tax regime to which they are tied, so it’s different for each client.
Fees have always been an important part of our analysis, since they are reflected in the profitability of each product. However, the tax changes we’ve seen have made us focus less on fees and more on the dilemma of moving our international investments into foreign or local funds.
We don’t pass on this responsibility to another team within our company, but we do suggest clients request advice from their tax advisors, since the tax treatment of each investor is different and it is therefore difficult to give general recommendations. Nevertheless, we always consider the possible tax benefits or drawbacks in any products we recommend.
A high fee doesn’t necessarily mean we’ll reject a product. If it generates alpha, after fees, we believe the higher cost is justified. However, we have rejected some funds, especially in the alternatives sector, because they were not able to generate the expected alpha and decorrelation with traditional markets, despite high costs.
José Luis Luarte
EuroAmerica AGF, Chile
The impact of tax on performance is one of several factors we consider in our fund selection process for balanced portfolios. For this reason, our universe of eligible funds are those listed or registered in countries where there are tax benefits or where we have taxation agreements, such as Luxembourg and Ireland.
We specialize in managing funds of funds, so local taxes mainly impact how we market our products registered here in Chile under the EuroAmerica AGF brand. If our funds have positive annual returns then the client has to pay local taxes on the annual income generated by our funds of funds. This impact depends on the international funds in which the managed portfolio is invested, we do not have to pay taxes for investing in offshore mutual funds.
Most of our clients invest in funds of funds, while direct investment into international funds, which would result in different tax treatment, is reserved for high-net -worth clients.
However, with these factors in mind, the total expense ratio always has a bearing on the funds we select for our portfolios. For this reason we always refer to the list of funds approved by our initial filters, which select those with appropriate and competitive TERs in line with the underlying asset and investment objectives.
Fund selection is an important part of our investment process, so we constantly review our picks to ensure they meet the quantitative and qualitative requirements previously established. The whole process takes about 12 hours per fund.