Northern Trust Solution Can Remove Tax Drag on 130/30 Fund Alpha

March 6, 2009 ( - Northern Trust announced it has enhanced its asset servicing solution for tax-transparent pooled vehicles to support certain short extension funds offered by investment managers.

The pooling solution preserves tax benefits that allow investors to achieve increased returns from their investment strategy, and is available via three pooling vehicles: the Common Contractual Fund (CCF), in Ireland; the Fonds voor Gemene Rekening (FGR) in The Netherlands, and the “Fonds Commun de Placement” (FCP) in Luxembourg, according to the announcement.

The principal advantage of a tax-transparent fund structure is that the tax authorities determine withholding rates based on the tax status of the underlying investors. An objective of multinational pooling is that each plan should pay the same tax withholding rate when investing through the pooling vehicle that it would have paid if it had invested directly in the securities held in the vehicle, Northern Trust explained.

“Tax-transparent pooling vehicles allow investment managers to pool assets from institutional investors, offering economies of scale and 30 basis points or more of additional return through the elimination of ‘tax drag’ when compared with a traditional pooled vehicle,” said Phil Caldwell, global product manager, for asset pooling at Northern Trust, in the announcement. “Short extension strategies, such as 130/30, have increased in popularity, but of key concern for our clients, was the issue of withholding tax, which can greatly cut into alpha. Northern Trust’s tax transparent pooling infrastructure, provides a solution to this issue, preserving the tax benefits created for pension investors.”

In addition to removing tax drag, Northern Trust’s proprietary pooling solution provides two key benefits for investment managers using short extension strategies:

  • Northern Trust has enhanced its fund accounting platform to allocate short positions, maintained by prime brokers, to each of the underlying investors in a pooled fund, thereby enhancing reporting and valuation, and
  • Northern Trust provides custody for long positions on the tax efficient pooling platform.