Investors will be able to access details of the portfolios of the full range of Vanguard investment funds on www.vanguard.com.au from 11 October 2012.
 
Vanguard’s Head of Market Strategy and Communications, Robin Bowerman said: “This move is designed to improve transparency for investors and ensure they have the information they need to make well informed investment decisions.”
 
“Better disclosure is high on the agenda of the Stronger Super and FOFA reforms for good reason.”
 
“We believe disclosure of both fees and fund holdings can play a large part in restoring investor’s faith, post the Global Financial Crisis, in the investment industry as a whole,” he said.
 
“It is something that is regarded as best practice in other major investment markets, where regulations dictate it,” said Mr Bowerman.
 
Of the 22 nations (constituents of the MSCI World Index) surveyed in a 2011 Morningstar Global Investors Report#, Australia and New Zealand were the only two countries that do not disclose fund holdings.
 
Vanguard Chief Investment Officer Joseph Brennan said: “We have always advocated broad diversification both across and within asset classes and believe this measure may deepen the understanding of the spectrum of diversification inherent in our funds. It allows investors to evaluate exactly what they are paying for.”
 
“Transparency of portfolio holdings goes hand in hand with our investment philosophy as an index provider and we want to demonstrate our true to label investment solutions which are practical and easy to understand,” Brennan said.
 
“There are no surprises to what our funds invest in given we are tracking benchmarks, but now investors can see the individual holdings for themselves.”
 
“As the first Australian manager to provide after tax reporting to investors back in 2005, we see this as a further measure to help investors be fully informed about what they are investing in,” he said.

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These fee changes have been made in line with Vanguard’s philosophy that keeping costs low is a significant factor in successful investment strategies.

Confirming the new fee structure in place from today, Vanguard’s Head of Product Management and Development, Robyn Laidlaw, said that the affected funds’ fees are now among the lowest in the Australian market. 

“In some cases, the new fees are one fifth of the average Australian wholesale managed fund fees for comparable asset classes [1],” she said.

Ms Laidlaw continued by saying that the fee changes have been made possible by the growth in Vanguard’s funds under management, and efficiencies driven by scale in these funds.

The reduced fees that come into force today are outlined below:  

“Low costs matter in both bear and bull markets,” said Ms Laidlaw.

“Investors can’t control the market just as investment managers can’t guarantee investment returns, but costs are one thing that can be controlled.”

Vanguard research shows that over time, savings on fees compound and can become very significant.

“In the 15 years since Vanguard began offering low cost index funds to the Australian market, for every $100,000 invested in Vanguard’s Australian Shares Index Fund, investors would have made an additional $25,000 due to lower costs, compared with the industry average fee [2],” she said.

2 August 2012

[1] Vanguard research based on Morningstar data and definition of ‘wholesale fund’
[2] Calculation assumes both industry average and Vanguard funds earn the annual historical return of the S&P/ASX 300 Index over 15 years commencing 30 April 1997. The industry average fee is calculated by Vanguard using Morningstar Direct data and definition of ‘wholesale fund’ and is the average fee for other Australian Shares wholesale funds minus Vanguard’s fund for the period 30 April 1997 to 30 April 2012. The fee used for Vanguard’s fund was 0.34% p.a. Assumes all distributions are reinvested with no capital withdrawals and takes no account of entry and exit fees and taxes. Assumes all other things are equal. The results would be different if an alternative index was chosen or if the survey of managers considered different or more funds. Past performance is not an indication of future performance.

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The purpose of index funds and ETF’s are being misused by placing too many of the growth assets of the portfolio into these options. It will only be apparent to investors when they retire as to what price they have paid while accumulating by being in low MER funds.

“Index funds are exposing investors to 100% of the volatility of the equity markets. With such a volatile outlook, investors would be much better served by having a portion of their equity investments in strategies that have the potential to soften the blow in a falling market”.  Investors should be made aware that the cost savings resulting from investing in these passive strategies will be insignificant in the event of a severe market correction” said Russel Pillemer, Chief Executive Officer, Pengana Capital.

Financial advisors should also be investing their clients into equity strategies that are designed to generate positive returns irrespective of movements in equity markets. Examples of these strategies are equity market neutral long short and special event strategies.

Pengana is finding strong demand from independent groups who have moved quickly to restructure their approved product lists and models in order to include these strategies in the face of increasing uncertainty and volatility in Global and Australian equity markets.

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Michael Elsworth, Research Manager, commented, “This change is based on Lonsec’s belief that index funds now have a critical mass in most asset classes.”

“We believe that different criteria are needed to ensure ratings fully capture the characteristics of index funds.”

Although using different criteria, Lonsec will continue to focus primarily on qualitative factors, which is the key focus of its research across all asset classes.

“There will continue to be a split of 80% qualitative and 20% quantitative factors, which is consistent with the research approach for active funds,” said Elsworth.

“The rating scale used for actively managed funds will be adopted for rating index funds – Highly Recommended, Recommended, Investment Grade and so on. The addition of superscript Index alerts advisers to the fact that different criteria have been applied to determine the rating.”

“Once an index fund has passed Lonsec’s initial research screens, funds will be assessed by conducting a peer relative assessment of people and resources, investment process, liquidity and performance,” continued Elsworth.

4 June 2012

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