Global Equities Underperformance Disguised as
Outperformance

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.