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Article

Global Equities Underperformance Disguised as
Outperformance

Megan Talmage, Aidan Puddy, Laurence Irlicht and Adam Randall
The Journal of Index Investing Winter 2016, 7 (3) 49-56; DOI: https://doi.org/10.3905/jii.2016.7.3.049
Megan Talmage
is an associate with indexed and quantitative equities at IFM Investors in Melbourne, VIC, Australia.
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  • For correspondence: megan.talmage@ifminvestors.com
Aidan Puddy
is the global head of indexed and quantitative equities at IFM Investors in Melbourne, VIC, Australia.
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  • For correspondence: aidan.puddy@ifminvestors.com
Laurence Irlicht
is the executive director of indexed and quantitative equities at IFM Investors in Melbourne, VIC, Australia.
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  • For correspondence: laurence.irlicht@ifminvestors.com
Adam Randall
is the investment director of indexed and quantitative equities at IFM Investors in Melbourne, VIC, Australia.
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  • For correspondence: adam.randall@ifminvestors.com
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Abstract

Investors exactly replicating the MSCI World Index can show an apparent outperformance versus MSCI World (net) of up to 50 basis points per annum, on average, depending on their country of residence. This apparent outperformance is entirely due to the different dividend-withholding tax rates in the benchmark versus what is actually applicable to the investor—and not due to manager skill. It arises because the withholding tax assumptions used in the construction of the benchmark are significantly higher than those actually faced by investors, due to the availability of double-taxation treaties. Investors need to be aware of this effect to ensure they don’t mistakenly attribute this apparent outperformance to manager skill. In this article, the authors calculate and explain this apparent outperformance for investors domiciled in the United States, Australia, Germany, Japan, Switzerland, or the United Kingdom and then propose a simple adjustment method to the net benchmark to better represent the actual return to investors based on their location and the actual withholding taxes incurred.

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The Journal of Index Investing: 7 (3)
The Journal of Index Investing
Vol. 7, Issue 3
Winter 2016
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Global Equities Underperformance Disguised as
Outperformance
Megan Talmage, Aidan Puddy, Laurence Irlicht, Adam Randall
The Journal of Index Investing Nov 2016, 7 (3) 49-56; DOI: 10.3905/jii.2016.7.3.049

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Global Equities Underperformance Disguised as
Outperformance
Megan Talmage, Aidan Puddy, Laurence Irlicht, Adam Randall
The Journal of Index Investing Nov 2016, 7 (3) 49-56; DOI: 10.3905/jii.2016.7.3.049
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  • Article
    • Abstract
    • MSCI WORLD INDEX: NET OR GROSS?
    • TAX TREATY ALPHA
    • QUANTIFYING THE TAX TREATY ALPHA
    • AN ADJUSTED BENCHMARK THAT APPROXIMATES THE TRUE TAXATION LEVEL
    • A SIMPLER WAY TO ESTIMATE THE ADJUSTED BENCHMARK
    • APPLYING THE FORMULA
    • APPLICATION OVER SHORTER TIME PERIODS
    • ALTERNATIVE OFFICIAL BENCHMARKS
    • IMPLICATIONS/CONCLUSIONS
    • ENDNOTES
    • REFERENCE
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