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.
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