Professor Deborah Ralston

The pre-eminent retirement incomes research organisation, the CSIRO-Monash University Superannuation Cluster, has secured another significant private sector backer with the decision by ANZ Wealth to join its ranks.

ANZ Wealth will join five other organisations as the key supporters of the $9 million research project that brings together academics from four universities, Monash, Warwick, Griffith and Western Australia, as well as the CSIRO, to examine the challenges facing the Australia’s retirement system.

The other five organisations are BT, Cbus, Mercer, Vanguard and Challenger, which, together Treasury, the ATO, the ABS, ASFA, National Seniors and AIST, form the Cluster’s Steering Committee with eminent researcher, Professor Hazel Bateman from the University of NSW. The Australian Centre for Financial Studies (ACFS), which promotes thought leadership in the financial services sector, leads the project for Monash University.

Patrick Clarke, Head of Direct Super and Investments at ANZ Wealth, said it was a privilege to be involved with the CSIRO-Monash University Superannuation Cluster.

“Over the past 18 months the work done by CSIRO and Monash in examining the dynamics and inter-relationships between superannuation and the wider economy, as well as the transition and retirement phase of Australians over 60, has been first class.

“We believe it’s critical that this research continues so that both the public and private sectors can base their decision–making on hard data in the vital area of superannuation.”

Dr Sarah Dods, CSIRO’s Research Director, Digital Economy, Digital Productivity and Services Flagship, said it was a tribute to the research done by the Cluster that such a significant player in the wealth management sector had decided to come on-board.

“We believe the research we have been conducting in areas such as ways to improve the participation of older workers is critical if we are to get the superannuation policy settings right, and for an organisation of the reputation of ANZ Wealth to give its support further endorses the value of our work.”

ACFS Executive Director, Professor Deborah Ralston, said the sheer size of the superannuation pool, at $1.8 trillion, posed important policy issues that the Cluster had been addressing.

“In the past, much of the research focus has been on asset allocation and the accumulation phase. But much less focus has been given to the post retirement phase and Australians over 60; a better retirement system is broader than superannuation, including pensions and private savings.

“What is critically needed for better policy and product development in post-retirement is a research evidence base.

“Funding for better health and welfare, accommodation and transport, they all have a bearing on the quality of the life enjoyed by older Australians and are important issues that demand a policy response, so the fact ANZ Wealth is giving its support to the Cluster is testimony we have the right focus and are adding to the pool of knowledge around retirement incomes policy.”

–END–

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Robin Bowerman

Vanguard and Investment Trends released the annual results of the 2014 Self Managed Super Fund Report, taking a detailed look at key drivers and challenges for Australian SMSF investors.

The SMSF sector now represents more than 30 per cent of the superannuation industry in Australia and continues to grow with assets increasing 13 per cent to $559 billion in the year to March 2014.  With more than 49 per cent of SMSFs in pension or drawdown phase, compared with 17 per cent for industry super funds, this sector of the superannuation system is blazing a trail in terms of managing retirement incomes.

The report is based on a survey of 2,163 SMSF investors and offers a comprehensive view of the sector—presenting detailed analysis about the changes to how SMSF portfolios are constructed, the increased appetite for international exposure and the growing proportion of investors willing to pay for unmet advice needs.

International exposure

Reflecting rising confidence levels among investors, the intention to invest in international shares by SMSFs almost doubled over the past 12 months to 22 percent (up from 12 per cent in April 2013).

However, common blockers to international exposure include:

• Insufficient knowledge of overseas markets (40 per cent)
• Currency risk (34 per cent)
• Lack of franking credits (33 per cent)

Professionally managed investments can help address many of the common blockers, so it’s not surprising to see a growing proportion of SMSFs who currently invest in ETFs said access to international markets is a key driver.

Commenting on the report, Robin Bowerman, Vanguard’s Head of Market Strategy & Communications, said: “It is clear that SMSF investors are looking to increase their exposure to international markets.

“The increased focus on international investing is valuable in a diversification sense however, we are cautious when key international markets like the U.S. sharemarket have had such strong performance in the past year and hope that advisers and investors are taking a long-term view because too often we see investors disappointed when chasing future returns based on recent past performance.”

Asset allocation

Over a quarter of SMSFs (27 per cent, up from 14 per cent) of SMSFs who made a substantial asset allocation change in the last 12 months did so to increase diversification.

Allocation to direct shares by SMSFs remained steady over the past 12 months (44 per cent of total SMSF assets, edging down from 45 per cent) while their allocation to cash declined to 23 per cent, down from 26 per cent. There was also an increase in the use of managed funds and the average investment by SMSFs who hold managed funds is now $210,000 which is a 23 per cent increase up from $170,000 in 2013.

The number of SMSFs holding ETFs has increased 41 per cent to 53,500 in the 12 months to April 2014 explaining, in part at least, the strong growth in the Australian ETF market which has recently passed $11.7 billion in assets.

The number of SMSFs planning to invest in ETFs for the first time in the coming year has jumped by 76 per cent to 58,000.

“ETFs offer SMSFs great tools with which to implement their portfolio’s asset allocation. They allow SMSFs the ability to access a market or market segment at a low cost, to diversify risk or implement a core-satellite strategy.

“Against a background of strong market returns separate portfolio research carried out by Vanguard’s Investment Strategy Group shows that SMSFs have a starkly different risk profile than that of institutional superannuation funds.

“If SMSF trustees appreciate the level of risk in their portfolio that is great. Our concern is that some SMSFs may feel they are investing conservatively where the analysis shows that they may have quite high levels of concentration and market risk within their portfolios.

“Investors should focus on developing an appropriate asset allocation mix consistent with realistic risk-and-return expectations,” said Mr. Bowerman.

Specialist administration

The Investment Trends research shows in 2014 approximately 150,000 SMSFs (a significant increase from 115,000 in 2013) are administered by specialist SMSF services. Annual tax reporting and audits (54 per cent) and low fees (45 per cent) were the most commonly cited drivers of selecting a specialist administration provider.

“Understandably, super fund costs remain a concern for investors and are a key driver behind the increase in the establishment of SMSFs. Naturally, during periods of flat or negative super fund returns, the number of new SMSFs being established will increase.

“While control always tops the list of reasons for establishing a SMSF Vanguard believes an underlying reason for the growth of SMSFs in the past five years is investors looking to cut the fees they pay superannuation funds.

“The interim report by the Financial System Inquiry raises the question about costs within the Australian super system. That is a debate we must have because in Vanguard’s view the growth in the system to $1.8 trillion of retirement savings has not delivered the lower costs you could expect from such economies of scale” said Mr. Bowerman.

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Vanguard and Investment Trends released the results of the 2014 Self Managed Super Fund (SMSF) Planner Report yesterday.

The report, which surveyed 489 financial advisers in April, demonstrates that trustees’ satisfaction with advisers has continued to grow over the past 12 months, reaching its highest level since the GFC. Positive market performance over the last year contributed to some of the increase, but the research shows that advisers’ technical expertise is also playing a greater role in driving satisfaction. Clarity around fees and charges remains a challenge.

The overall proportion of SMSFs using a financial planner stopped its six-year decline and stabilised over the last year at 41 per cent using one in the last 12 months.

With 54 per cent of SMSFs now open to tapping into advisers’ expertise, a clear opportunity exists for financial advisers. These levels of interest are the highest observed since Investment Trends began tracking this in 2009.

Furthermore, a projected 286,000 SMSFs have unmet advice needs they are willing to pay for.

Over the last year, SMSF trustees have been placing a greater premium on diversification and planners have been responsive to this; a top priority for financial advisers specialising in SMSFs is diversification with 77 per cent (up 10 percentage points) now saying this is a key factor when selecting investments for their clients.

A clear trend emerging is the use of ETFs, particularly to gain access to international markets.

Commenting on the report, Michael Lovett, Vanguard’s Head of Adviser Distribution said:  “These findings demonstrate the significant opportunity professional advisers have to expand their service offering in the SMSF sector. The willingness of SMSF investors to engage with a financial adviser continues to increase, particularly around unmet advice needs such as inheritance planning and protection of assets against market falls.

“While there is a strong message here for advisers around how they can enhance their value proposition with SMSF trustees, that has to be kept in context with the strong correlation between satisfaction with advisers and investment market performance.

“The challenge for advisers is to demonstrate that the value of good financial advice is much broader than investment selection.

“The analysis from SMSF investors found multiple elements that contribute to their satisfaction with advisers – outside of investment selection. These include: technical expertise, tax expertise, quality of support staff and clarity of fees and charges.

“The research also found that the number of specialist SMSF financial advisers is growing and Vanguard welcomes the increasing focus on higher education and professional standards in the SMSF advice sector,” said Mr. Lovett.

Opportunity knocks

Cost of advice remains an issue for investors. Despite this, when specifically asked how they would prefer to receive help from an adviser, compared to 2013, a growing proportion of total SMSF investors (12 per cent up from 7 per cent last year) say they would prefer face-to-face communication even if it will cost more. A larger proportion, 19 per cent, is open to receiving advice over the phone and online.

When it comes to unmet advice needs, SMSFs are seeking ways to protect assets and income against market falls. That may not be surprising considering their demographic, and with the GFC still a recent memory – but it is advice which SMSF trustees are prepared to pay for and suggests the opportunity for advisers to have conversations based more around risk control than just portfolio returns.

The most common areas of unmet advice needs advisers can add to their total value proposition according to the trustees surveyed include:

• Inheritance and estate planning (27 per cent of those with unmet advice needs);
• Age pension and other entitlements (27 per cent); and
• SMSFs pension strategies (24 per cent)

SMSFs who say they have unmet advice needs are prepared to pay up to $2,500 per annum for advice that meets their needs, on average, up from $2,000 last year.

The power of past performance

The 2014 research shows advisers and SMSF investors are increasingly focused on diversification. Over a quarter (27 per cent up from 14 per cent) of SMSFs who made substantial asset allocation changes did so to increase diversification and concurrently 77 per cent of SMSF planners note diversification as their top investment priority up from 67 per cent.

Over the past 12 months, planners estimate they placed 31 per cent of new SMSF inflows in international assets, up from 25 per cent in 2013. They also expect this will grow to 35 per cent over the next 12 months.

“Diversification is critical in managing volatility and giving investors the best possible chance of long-term success. The increased focus on international exposure is valuable in a diversification sense however, we are cautious when key international markets like the U.S. sharemarket have had such strong performance in the past year and hope that advisers and investors are taking a long-term view.

“Ultimately, the value of a financial adviser is in their role as a behavioural coach. This involves understanding clients’ risk appetite and setting the strategic asset allocation for a client’s portfolio,” said Mr. Lovett.

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Australian ETF market records its highest ever annual growth in 2013.

The Australian exchange traded fund (ETF) market recorded its highest ever annual growth in 2013, with funds under management increasing by $3.5 billion (55%) to end the year at a new record high of $10 billion.

Over the course of 2013, ETFs took in approximately $2.4 billion of new money, up 180% on 2012’s net inflows. By comparison, retail managed funds achieved just an 18% increase in net inflows in the 12 months to end September 2013[1].

Inflows were concentrated between three product issuers in the industry. iShares, Vanguard and BetaShares together accounted for 97% of the total net inflows over 2013.

Alex Vynokur, Managing Director of BetaShares said: “2013 was a hallmark year for the ETF industry, with funds under management continuing to reach new record highs.”

International equities emerged as the key trend for the year, with approximately $1 billion flowing towards funds offering exposure to developed equities markets. US equities funds were overwhelmingly the best performing products of 2013, with the top performing fund returning 66%.

“The US equities markets continued to test record highs while the Australian currency weakened against the US dollar, leading to strong performance of currency unhedged equity ETFs tracking US markets,” said Mr Vynokur. Small and mid-cap funds did particularly well, with three of the top five performing products being focused on US small and mid-cap stock exposures.”

The other prevalent theme for the year was the continued search for yield as $500 million of new money flowed into high yield products and another $200 million was allocated to the Australian High Interest Cash ETF.

“Despite the ASX rising sharply during 2013 and recording double digit capital growth, investors continued to remain focussed on yield for their portfolios, a trend we expect to continue into 2014,” he said.

Commenting on the outlook for the ETF industry in 2014, Mr Vynokur said he expected sustained industry growth as all types of investors continued to embrace ETFs. “We saw investors and advisers continue to adopt ETFs as portfolio construction and trading tools as they become increasingly mainstream. We believe the industry is poised to maintain its fast momentum this year, and expect to see total funds under management at $14 billion with over 100 exchange traded funds on the ASX by the end of 2014.”

A powerful finish to 2013

Despite December being a traditionally quiet month, the ETF industry still managed to achieve solid growth, with around $235 million of new money flowing into the market.

“As the year drew to a close we saw a continuation of November’s trend towards domestic equities, with three of the top five products by inflows offering Australian share exposure,” said Mr Vynokur. “This suggests investors are remaining bullish on domestic and international equities and executing risk-on trades.”

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SMSF nest-eggs increase to $496B

Key points:

• SMSF assets grew to $496 billion in the year to March 2013 representing 32 per cent of the overall super industry.
• Asset allocation study highlights room for improvement with large skew towards direct share investment and cash neglecting potential cost and diversification issues.
• SMSF investors continue to drive growth in ETF investment.

Vanguard and Investment Trends released the results of the April 2013 Self Managed Super Fund Report, providing a comprehensive look under the bonnet of the largest superannuation sector in Australia.

The Self Managed Super Fund (SMSF) sector now represents 32 per cent of superannuation industry in Australia, growing to $496 billion in assets. One third of SMSFs are now valued at over $1 million, and together control 73 per cent of all SMSF assets.

Fieldwork for the report was conducted in March and April of 2013 and the research which represents a survey of almost 2000 SMSF trustees uncovers detailed analysis of how SMSF trustees are constructing their portfolios and who they are consulting for advice and assistance with administration.

Asset allocation

The findings report 35 per cent of SMSF investors made substantial asset allocation changes in the past year with 39 per cent of those looking to be more defensive, while 26 per cent did so to be more aggressive in their asset allocation.

Allocations to cash fell for the first time since 2010, comprising 26 per cent of total SMSF assets, down from 28 per cent last year. Allocations to direct shares increased by 5 per cent to now make up 45 per cent of investors’ portfolios. On average SMSFs hold 18 different direct shares in their portfolio, with 30 per cent trading shares at least once a month.

The total amount sitting in cash was $140 billion, of which $46 billion is classified as excess cash (or cash that would normally be invested in other investments but for recent market volatility). This excess cash figure has fallen by $4 billion since the previous study. 83 per cent of investors say that when they do decide to invest their excess cash, they will use some of it to invest in direct shares.

8 per cent of SMSFs now hold ETFs in their portfolio, making up about 1 per cent of total SMSF investments. The number of SMSF investors holding ETFs has increased by 28 per cent over the past 12 months (to April 2013). The study also shows a 54 per cent increase in the number of SMSFs intending to invest in ETFs in the coming year. The vast majority of SMSFs who invest in ETFs use broadly diversified Australian and international equity ETFs.

Only three in 10 SMSFs are currently invested or intend to invest in fixed income in the future.

Robin Bowerman, Head of Market Strategy and Communication said “SMSF investors are clearly demonstrating a strong preference for directly investing in shares and cash”

“While the focus on Australian shares is understandable, it points to investors focusing on specific shares and tax or income outcomes and not taking a strategic asset allocation view of their portfolio. That means SMSF investors may not fully appreciate the risks and the costs involved in holding a concentrated portfolio of direct shares.

“There is a stark difference between large institutional super funds and SMSFs in the way they construct portfolios. Professional institutional investors typically begin with the asset allocation decisions. It is a straightforward comparison to make and a way SMSF trustees can benchmark themselves not just on performance but also on risk.

“When it comes to risk, SMSFs shouldn’t discount the importance of fixed income as part of a strategic defensive investment – term deposits should be viewed as a short term savings vehicle rather than a long term defensive investment given they don’t offer the same negative correlation to equities.

“Fixed income may be out of favour as an asset class at the moment but for a long term investor it performs an important role which cash doesn’t provide, which is to offset the volatility of equity markets and provide a steady income”.

Use of advisers

The 2013 survey showed satisfaction with advisers has improved across every area measured, and 83 per cent now rate their main adviser as good or very good overall, up from 76 per cent in 2012. Most of the improvement is driven by the proportion who rate their adviser as “very good” (44 per cent, up from 29 per cent).

This study reconfirms the fact that SMSFs use financial advice to complement their investment decision making rather than delegating the full process.

218,000 SMSFs report that they have unmet advice needs, and are willing to spend an average of $2,000 p.a. each to meet these needs. Major advice gaps included inheritance & estate planning, borrowing within the SMSF and buying distressed or undervalued assets.

Over a third of SMSFs said they currently use an accountant only for tax advice but 45 per cent of these said they would consider also using them for investment advice if they offered it. This is significant given accountants’ expectations following recent licensing reforms.

“This points to the need for both accountants and advisers to have specialist skills and training to properly service these investors” said Mr Bowerman.

Next wave of SMSFs

The report this year also considered recent SMSF set ups and the next generation of SMSF investors looking at trends in reasons for establishing their fund.

Control, investing in property via super, saving fees, and the belief that they would make better decisions than their super fund were the top five reasons given for intending to switch into an SMSF in the next 12 months.

42 per cent of this next wave of SMSF investors say that they would consider staying with their existing super fund if fees were lower.

“These investors are clearly very cost conscious and unwilling to pay where they don’t see value. The message seems loud and clear to the industry, equally for professional managers, super funds and advisers. Having a very clear value proposition to justify costs charged is critically important to attracting SMSF investors” said Mr Bowerman.

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Advisers thriving in the SMSf space.

Key points:

• Advisers thriving in the SMSF sector say that their value proposition to SMSF investors, their relationships with accountants and their ability to do administration in-house are key success factors.
• Key challenges for SMSF advisers include concessional cap changes, dealing with unsuitable SMSF set ups and dealing with compliance aspects of SMSFs.
• Asset allocation decisions focused on generating income and franked dividends.

Vanguard and Investment Trends released the results of the April 2013 Self Managed Super Fund Planner Report yesterday, examining how Australian financial planners interact with Self Managed Super Fund (SMSF) investors.

The report, which surveys more than 400 advisers, reveals that some advisers are racing ahead of the pack in servicing SMSF investors, while others struggle to demonstrate their value. The report groups feedback from planners into two groups – SMSF specialists who service 20 or more SMSF clients and SMSF generalists who service fewer than 20 SMSF clients.

Planners in general have been struggling somewhat in the SMSF space over the last few years, unable meet the growth they have been anticipating for the past few years.

However, some planners have been more successful than others. There are now more planners who fall under the SMSF specialist category (25 per cent, up from 23 per cent last year), and these planners derive half (49 per cent) their practice revenue from SMSFs, up from 44 per cent in 2011.

In contrast, SMSF generalists have not found their place in this booming market yet, with their revenue from SMSF clients remaining steady at 19 per cent over the same period.

Advisers who said they are succeeding (find it easy to attract and retain SMSF clients) were more likely to say their value proposition resonates with SMSFs, they work closely with (or in) accounting firms and do the administration for SMSF investors in house.

Planners are charging on average 17 per cent more in upfront fees than last year for their service and 5 per cent more for ongoing fees.

When asked about their single biggest challenge to servicing the SMSF sector, specialists cite falls in concessional contribution caps and keeping fees competitive as their greatest hurdles. Meanwhile, SMSF generalists’ challenges relate to relationships with accounting firms and finding clients.

Commenting on the report, Michael Lovett, Vanguard’s Head of Adviser Distribution said:

“It’s clear from this report that there continues to be a large and growing opportunity for advisers servicing the SMSF space. Those advisers that are specialising their businesses, demonstrating clear value propositions for clients and working well with accountants and other SMSF influencers seem to be the clear contenders in this sector.

“There is a strong message for advisers who want to excel in this sector to safeguard their practice and add immense value to investors by spending more of their time looking at areas of unmet advice to their clients.

“Our studies show that for advisers, creating this point of difference in their practice value proposition can ensure they present a more enduring model, particularly in this new fee for service world which the Future of Financial Advice reforms have introduced”.

Asset allocation

SMSF planners estimate they influence $145 billion of SMSF assets.

There was a marked increase in the flow of money into investments other than cash following the rise of investor confidence at the start of 2013.

Asset allocation strategies differ between specialists and generalists, with specialists tending to allocate more to direct shares – 29 per cent of new SMSF investments versus 23 per cent by generalists, and less to active managed funds. Specialists project direct shares to grow to 32 per cent of new SMSF investments by 2016.

SMSF specialists also had a greater level of ETF usage than generalists (5 per cent versus 3 per cent).

Advisers said their top priority when selecting investments for SMSF clients was the availability of franked dividends. The lack of dividends and income from international shares investments was the biggest barrier to their allocation to international assets for SMSF clients.

Use of term deposits was similar between the two groups of planners, with specialists allocating 16 per cent versus generalists at 15 per cent, and both expecting to reduce this below 11 per cent by 2016.

Both groups say they currently allocate about 30 per cent to cash and fixed income assets, but expect this to fall by 2016.

More than 20 per cent of specialist SMSF advisers say they need a better range of annuities and longevity protection products than are currently available, while generalists said that they need lower cost platforms to better service this client group. Access to emerging markets and Asian countries was cited as a gap for planners in this market.

Unmet advice needs

218,000 SMSF investors still have unmet advice needs that they are willing to pay for, which represents an opportunity for all advisers. More than a third of SMSF investors who were willing to pay to fill the gaps in advice said that inheritance and estate planning was the biggest unmet area.

In addition, borrowing within the SMSF, buying distressed assets, buying investment property and tax planning were all significant areas of unmet advice needs.

Accountants versus financial planners

While some advisers have strong working relationships with accountants, two in five report having had some issues involving accountants where SMSFs were being established for clients inappropriately.

Nearly half (48 per cent) of advisers said that the regulatory reform on limited licensing for accountants will have a positive impact on their overall business income and 34 per cent expect it will increase their SMSF client base.

SMSF specialists were much more likely to work for an accountancy firm (27 per cent) and slightly more had several accountants referring work to them.

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Buy and sell spreads are necessary to recover the costs of transactional activity from investors entering or leaving the fund so that existing investors in the fund are not subsidising costs from these transactions.

Improved liquidity in the local bond market and reduced volatility in international bond markets contributed to the lowering of costs in the fixed income funds range. Reduced transaction costs and lower commissions served to reduce the spreads for the equity funds.

In the past 12 months, Vanguard has announced a number of management fee and buy and sell spread changes both to its unlisted managed funds and ETFs, and continuously seeks to find further cost efficiencies which can be passed back to benefit investors through regular reviews of its funds.

Speaking about the change, Robyn Laidlaw, Vanguard’s Head of Product and Marketing said:
“As we always tell our investors, cost is the one controllable factor in investing as it is known in advance. Our goal is to ensure that our investors are always given the best opportunity for investment success and providing value through low cost is one of the ways we stay true to this promise.”

These buy and sell spreads reflect the true cost of transactions in the funds and are paid into the fund to compensate for transactional activity. Vanguard does not profit from these spread costs. The spreads are subject to change and can increase or decrease depending on a range of factors.

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The global fall in interest rates to very low levels following the 2008 financial crisis has provided fixed income investors with significantly above average returns, leading to suggestions of a bond bubble that could burst if yields start to rise rapidly.

The paper, authored by Rosemary Steinfort, Investment Analyst, Vanguard Australia, demonstrates that the characteristics of fixed income assets and the enduring role that they play in providing income, capital stability and diversification in a portfolio despite these concerns.

The paper describes why bond returns respond efficiently to changes in interest rates and have a well defined income stream.  In addition the transparency of central banks and inflation targeting policies reduces the likelihood of unexpected large interest rate adjustments.

Speaking about the paper, Greg Davis, Chief Investment Officer, Vanguard Asia-Pacific said:

“Bond markets operate differently to equity markets and this paper confirms that in reality a bond market bubble in the same context as we might define an equity market bubble is not possible.”

“By splitting the performance of a bond into income and price, we can distinguish that over the longer term, income will have the greatest impact on returns regardless of interest rate fluctuations.

“The key considerations for any prospective bond investor are related to their motivation for investing in bonds – if you are investing in bonds for their income or diversification properties, then you should not be concerned about changes in interest rates.

“However if you are investing in bonds because of past high performance, then you need to be realistic in your expectations, the next 10 years are unlikely to look like the past 10 years,” said Mr Davis.

The paper concludes that, in the main, investors should not view a bond bear market with the same level of apprehension as an equity bear market. Furthermore, a balanced diversified portfolio incorporating good quality defensive and growth assets should produce attractive risk return outcomes for investors over the long term, irrespective of interest rates.

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Investors searching for yield in this environment of falling interest rates can be tempted to head down a risky path which overlooks the basic rules of diversification.

The importance of an adviser’s role in assessing their client’s specific needs and crafting a diversified portfolio that can support sustainable spending is crucial.

Vanguard’s research paper ‘Desperately Seeking Yield’ highlights a number of examples that illustrate the dangers of pursuing yield in individual assets without considering the various risks.

The research shows that diversified income generated by Australian equities plays an important role in most portfolios particularly as equity investments also provide the opportunity for growth. However to offset the systematic risk which equities generate, including other asset classes such as fixed income to moderate the volatility can be beneficial – this is demonstrated by the table below showing the diverse profiles of various income generating asset classes.

Lower yields from traditional fixed income investments have prompted some investors to over-concentrate a portfolio on a small set of assets or select assets with promises of fixed income like outcomes, however these tactics have inherent risks.

One example is hybrid securities which are marketed with yields superior to common debt offerings, however, in times of market stress issuers have exercised the flexibility of non-uniform terms to vary or cease coupon payments entirely.
The major shortcoming of focusing exclusively on yield from one asset class is material as it undervalues the importance of diversification in portfolios. Such a strategy can also challenge a portfolio’s liquidity and the sustainability of the yield itself.

Focusing instead on a ‘total return’ approach, which encompasses both income and capital return components, can serve to maintain portfolio diversification and increase the longevity of the portfolio.

In the scenario where outgoings exceed income, drawing from capital appreciation of the portfolio rather than sacrificing diversification and over-weighting higher yielding sectors of the market can improve portfolio longevity.

Even in situations where yield is a high priority, portfolio construction should still adhere to fundamental asset allocation principles, investors would be better served not chasing the prevailing yield of the day, but seeking diversified income streams by focusing on total returns.

Whether investors are early in their investing life or drawing on a portfolio in retirement, the opportunity exists for advisers to offer value through assisting clients to understand the value of diversification in building long-term strategic portfolios.

If you would like to read more on this topic you can click here to view Vanguard’s research paper.

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Discussing the change, Vanguard’s Head of Product and Marketing, Robyn Laidlaw said “Keeping investment costs low for investors is at the heart of Vanguard’s investment approach.

“This represents a big difference between Vanguard and some competitors in the investment management industry because low costs are not a marketing ploy – our expense ratios are not driven up or down based on market share goals or revenue targets.

“This fee reduction is a function of Vanguard’s mutual corporate structure in the US which allows economies-of-scale savings to be passed along to our investors in the form of lower expense ratios as fund assets grow,” said Ms Laidlaw.

VEU is a cross-listed [2] ETF tracking the FTSE All-World ex US Index which offers investors a diverse portfolio of around 2300 securities of companies located in both the developed and emerging markets.

VEU began trading on the Australian Securities Exchange (ASX) in May 2009 and in the US in March 2007. The total size of this ETF (including US and Australian investments) was A$8.1 billion as at 31 December 2012.

In the past 12 months Vanguard has announced significant price reductions across seven of its flagship Australian-domiciled wholesale index funds and two cross-listed ETFs. Since VEU was quoted for trading on the ASX in 2009 its management expense ratio has declined by 10 basis points.

Vanguard now offers a range of nine ETFs across Australian and international equities, Australian property and Australian fixed income and December 2012 figures show Vanguard’s total Australian ETF funds under management had grown from A$351 million at the end of 2011 to A$636 million as at 31 December 2012.

[1] Management costs are expressed as a percentage of the average net assets of ETFs. As the value of these assets may change over time, the actual management costs for a period may be higher or lower than the costs published in the prospectus.

[2] Cross-listed ETFs make it possible for Australian investors to access funds which they may not normally have access to on overseas share markets by cross-listing the fund on the local exchange. It is priced in local currency (e.g. Australian dollars) and sold (in Australia) as CHESS Depository Interests (CDIs).

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