Vanguard launches index fund for UK defined benefits area
The Vanguard US Equity Index Common Contractual Fund (CCF) has been launched to give institutional investors access to underlying US equities without paying local witholding taxes.
The CCF structure is Ucits III compliant passive open ended structure, benchmarked against the S&P 500 index.
As a CCF it enables investors to achieve returns as if they invested in the underlying securities directly, but without being hit by US witholding taxes – which would be the case if invested directly.
UK open ended investment companies (OEICs) are taxed 15% on dividends from US equities. Irish VCCs are taxed at a rate of 30% on the same type of asset.
That means, Vanguard said, that a qualifying UK institutional investor, including pension funds, would achieve a higher after tax return through a CCF than through an equivalent mutual fund.
It estimates the difference could be up to £30,0000 on a £10m US equity fund domiciled in the UK, and up to £60,000 on a similar fund domiciled in Ireland.
Thomas Rampulla, managing director, Vanguard Asset Management, said: “Taxes are one of the greatest detractors of investment returns, so the tax transparency of the CCF approach should appeal to defined contribution plans and their plan participants.”
“By minimising the tax cost, and following a low cost index approach, employees in the plan are better positioned to achieve their retirement savings goals more quickly. Pension schemes expend considerable effort to find the lowest total expense ratio fund for a given mandate, but shopping for price alone can be self defeating if they don’t take account of the tax drag, which can obliterate a perceived cost advantage.”