End is nigh for index huggers

Ever more funds have started to publish their 'active share' scores. Merryn Somerset Webb explains why that's great news for investors.

Over the last few years there has been a growing consensus that corporation tax is all but impossible to collect from multinational companies. Given that they can effectively declare their profits and hence be taxed (or not) anywhere they fancy, it has seemed to a good many analysts that it is hardly worth the bother of trying to pin them down.Better to let globalisation take its course and find other ways to raise tax revenue.

We have never been convinced on this one, on the simple basis that sovereign states can pretty much do what they want, if only they have the political will to do so. Today, with their whopping debt problems and the rise of angry chatter against tax-avoiding corporations and "the rich", they do.

That's why Barack Obama has announced a new plan to charge a one-off tax of 14% on all the earnings US companies hold abroad. Far from being helpless in the face of globally mobile cash piles, it turns out that America can use its sovereign power to simply declare that it is going to extend its tax reach around the world. Job done.

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This is more interesting than you might think. That's because is it part of a much wider global trend of governments trying to keep tax revenues they believe to be rightfully theirs inside their own borders. Japan is launching a tax grab on its rich by charging them exit taxes if they move abroad.

The UK has been talking about using a mansion tax to grab some of the wealth of London's non-resident rich while pushing up non-dom charges, and George Osborne introduced his diverted profits tax (aimed at the same lot as Obama's cash tax) last year.

If governments were capable of cutting their spending, none of this would be necessary. But they aren't. There's been much talk of austerity and cutting the size of the state in the UK, for example, but the truth is that the basic government model (tax, overspend, borrow, tax some more) hasn't even begun to change. That is a shame and a guarantee that the age of tax-raising creativity has only just begun.

This week brought good news too. Another area we thought was so stuck in its rip-off rut that there was little point in hoping for it to change has surprised us. We have written often about the failures of the fund-management business, so we are thrilled to see that more and more companies have started to reveal the 'active share' (AS) of their funds.

A published AS offers an excellent way for you to see at a glance if your fund manager is a genuine value-adding stock picker or an index-hugging career cruiser. It also takes us another step down the road towards transparency. And the further down that road we go, the fewer of the cruisers will survive. That is a very good thing.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.