[OPINION] Tax Efficiency vs. Real Returns: Are you being penny wise and pound foolish?
We’ve all been there—staring at a spreadsheet, trying to find the most "efficient" way to grow our nest egg. In New Zealand, the conversation frequently starts with tax.
Thursday, February 5th 2026, 8:54AM
by Andy Mahony
Specifically, the Portfolio Investment Entity (PIE) regime. It’s become a bit of a national pastime to hunt for that capped 28% tax rate like it’s a hidden treasure.
But what if the very first step you take—your "entry point" into the decision—is actually sabotaging your long-term wealth? By obsessing over the tax wrapper before looking at the engine inside, you might be missing the forest for the kauri trees.
After reading Edward de Bono’s classic, Lateral Thinking, I jotted down the following learnings regarding “entry points” as applied to the thought process on fund manager selection. The initial perspective often dictates the entire line of reasoning, but a subtle shift in focus possesses the potential to fundamentally redefine the situation.
Here is why your "tax-first" approach might be leading you down the wrong garden path.
1. The Peril of the Preconditioned Entry Point
Edward de Bono, the father of lateral thinking, argued that how we enter a problem dictates where we end up. If you start with a fixed entry point, your brain naturally builds a logical path from that specific spot, ignoring entire landscapes of better alternatives.
In New Zealand investing, the "PIE-first" entry point acts like a set of blinkers. When you lead with tax efficiency, your search criteria are immediately narrowed. You aren’t looking for the "best fund manager"; you are looking for the "best PIE-compliant manager." This slight shift in attention restructures the entire situation, often excluding world-class offshore vehicles that might outperform the tax savings ten times over.
2. Tax Efficiency is a Feature, Not a Strategy
It’s easy to get "stuck" on the 28% PIR cap. It feels like a guaranteed win. However, a tax-efficient vehicle wrapped around a mediocre investment strategy is still, at the end of the day, a mediocre investment.
When we prioritise the tax wrapper, we often overlook the "alpha"—the actual skill of the manager to beat the market. A manager who returns 15% after-tax in a non-PIE structure is infinitely better than a "tax-efficient" manager returning 8%. As de Bono suggests, once a pattern of thought is established, we only look for evidence to support it. We celebrate the marginal tax saving while ignoring the glaring opportunity cost.
3. The "Tail Wagging the Dog" Problem in Portfolio Construction
In the world of professional fund selection, we call this "the tail wagging the dog." Good portfolio construction should be a hierarchy: asset class first, manager and strategy second, and vehicle (tax) last.
By flipping the script and starting with the vehicle, you risk "settling." You might find a manager who is "fine" and happens to have a PIE fund, rather than seeking out the absolute best-in-class talent globally. In New Zealand, our local market is small. If you limit yourself only to those who have set up local PIE structures, you are fishing in a much smaller pond, potentially missing out on specialised sectors or innovative strategies available offshore.
4. Hidden Fees and the "PIE Premium"
Ironically, the rush toward tax efficiency can lead to higher costs elsewhere. Sometimes, the administrative burden of running a PIE fund in New Zealand means the total expense ratio (TER) is slightly higher than a similar wholesale fund overseas.
If you don't look past the entry point of "tax savings," you might fail to notice that you’re paying a "PIE premium" in management fees and expenses. It’s a classic case of being "penny wise and pound foolish." We need to be analytical enough to run the numbers on the total cost of ownership, rather than just the line item for the IRD.
A New Way of Thinking
The goal isn't to ignore tax—that would be stark raving mad. The goal is to ensure that tax is the final filter, not the first one.
By changing your entry point from "How do I save tax?" to "Who is the best person to manage my capital?", you open up a much wider array of possibilities.
Next time you’re reviewing your portfolio or looking at a new fund, try a bit of lateral thinking. Step away from the PIE for a moment. Look at the raw performance, the philosophy, the business, and the people. You might find that what looks like an "expensive" tax path is actually the one that leaves you with the most money in your pocket at the end of the day.
If you were to ignore the tax implications entirely for just ten minutes, which fund manager would you actually choose?
Andy Mahony is a partner at Ramsgate Advisors. Previously he held reseach and analyst roles at ANZ and Research IP.
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