Libertas
Wealth Management Ideas Forum:
SMSFs and ETFs
Paul Chin:
Julie Scurfield:
Senior Investment Analyst
Business Development Manager NSW
For institutional use only. Not for distribution to retail investors.
A business to partner with
Global strength & resources
Australian footprint

The Vanguard Group founded in 1975

Headquarters in Melbourne

Over A$3 trillion global funds under

Offices in Sydney, Brisbane & Perth
management

48 investment crew

Index pioneer

45 traditional managed funds and ETFs

> 13,500 crew
Vanguard Global Funds Under
Management: as at 31 Dec 2013
33%
67%
For institutional use only. Not for distribution to retail investors.
*As at 31 December 2013
2
Vanguard’s ownership structure makes us different
•
Alignment of interests
The Vanguard Group Inc. cost advantage
Average expense ratios†
•
Low cost investment solutions
All funds
††
1.11%
1.50%
1.25%
1.08%
1.00%
0.75%
0.50%
0.89%
Vanguard
0.19%
0.25%
0.00%
1975
2012
Expense ratios as at 31 December 2012. Vanguard expense ratios range
from 0.02 to 1.71%.
† Represented as a percentage of net assets.
†† Sources: 1975–1977 Weisenberger Panorama; and Lipper Inc. thereafter.
‡ Source: Lipper, Inc.
Note: Information displayed is in reference to US-domiciled Vanguard funds.
For institutional use only. Not for distribution to retail investors.
3
Vanguard’s low-cost advantage
The average expense ratio for Vanguard ETFs is 17 basis points, while the Australian
industry average is 31 basis points*
Average ETF management cost in Australia
0.31%
0.17%
Vanguard ETFs
Industry
Source: ASX with Vanguard calculations, weighted by funds under management as at 31 December 2013.
For institutional use only. Not for distribution to retail investors.
4
SMSFs: changing the world one fund at a time
$506 billion in assets and 963,000 individual
trustees
• Average of 26,000 new funds a year since June
2008
• Key drivers:
– Control
– Cost
– Tax/franking credits
Number of SMSFs
(Source: APRA Quarterly Superannuation Performance Report)
550,000
500,000
450,000
400,000
366k
353k359k
347k
339k
350,000
503k
498k
488k
477k
469k
460k
453k
443k
435k
428k
421k
413k
407k
402k
396k
392k
386k
380k
374k
320k
313k
307k
301k
300,000
M
ar
-0
Ju 6
nSe 06
pD 06
ec
M 06
ar
-0
Ju 7
nSe 07
pD 07
ec
M 07
ar
-0
Ju 8
nSe 08
pD 08
ec
M 08
ar
-0
Ju 9
nSe 09
pD 09
ec
M 09
ar
-1
Ju 0
nSe 10
pD 10
ec
M 10
ar
-1
Ju 1
nSe 11
pD 11
ec
M 11
ar
-1
Ju 2
nSe 12
pD 12
ec
M 12
ar
-1
3
• There are now 509,000+ SMSFs in existence* with
Which is challenging the industry on a number of fronts…
•
Industry funds
− Heavy outflows in pension mode
− High account balance clients deserting funds
− Launching member-directed investment options to retain
members/assets
•
Adviser platforms
− Adds high cost layer
− Accountants entering adviser licensing regime
5
For institutional use only. Not for distribution to retail investors.
* ATO SMSF statistical bulletin June 2013
Typical Allocation of SMSF* versus Vanguard diversified funds
* Investment Trends, “April 2013 Self
Managed Super Fund: Investor Report”,
vol. 2, p. 251, June 2013.
Asset Class
(proxy for simulation)
For institutional use only. Not for distribution to retail investors.
6
The obvious risks … and the known unknowns
Trustee overconfidence
•
Cash allocations protected many
SMSFs through the GFC (skill vs. luck?)
Pursuit of high yield
•
•
Tax value of franking credits
High yield hybrid offers
The SMSF challenge:
Uncovering the risk vs return profile within 509,000
portfolios…
Asset allocation
•
•
Concentration risk ( no. of shares)
Lack of diversification
−
−
−
International (equities and FI)
Domestic fixed income
Residential property
For institutional use only. Not for distribution to retail investors.
7
Vanguard ISG Methodology for SMSF Simulations
… a random walk
• Constructed portfolios of randomly selected securities that matched
allocation of typical self-managed super funds (SMSFs),
determined from survey of 1,305 SMSF investors
• Generated 1000 simulated SMSFs using historical returns
• Investigated return paths & risk profiles of these simulated SMSF
returns
• Investigated three different compositions for equity portion of
simulated SMSFs:
1. All equities selected from S&P/ASX 300
2. Most equities selected from large-cap stocks
3. Most equities selected from high-yielding stocks
• Used conservative approach to simulations, true risks even higher
For institutional use only. Not for distribution to retail investors.
8
Broad-based equity portfolio:
Return paths for 1000 simulated portfolios of typical SMSFs
45% equity allocation in
equally weighted securities:
- 18 equities from S&P/ASX 300
• Large spread of potential return
paths
• Return path volatility of
simulated SMSFs higher than
for diversified growth fund
• Significant potential for very
poor performance
Source: Vanguard, Bloomberg, and FactSet Oct 2013
For institutional use only. Not for distribution to retail investors.
9
Simulated risk for typical SMSF:
Broad-based equity portfolio
Risk of typical SMSF
in turbulent times
almost double risk of
diversified growth fund
Source: Vanguard, Bloomberg, and FactSet Oct 2013
For institutional use only. Not for distribution to retail investors.
10
High-yielding equity portfolio:
Returns paths for 1000 simulated portfolio of typical SMSFs:
45% equity allocation in
equally weighted securities: -15
equities high-yielding
& 3 equities from S&P/ASX 300
• High-yield membership
calculated by ranking 6-month
yield calc 1-year prior &
selecting top quartile equities
• Lower spread of returns than
broad-based index simulation
Source: Vanguard, Bloomberg, and FactSet Oct 2013
For institutional use only. Not for distribution to retail investors.
11
Simulated risk for typical SMSF:
High-yielding equities
Risk of typical SMSF
in turbulent times
almost double risk of
diversified growth fund
Source: Vanguard, Bloomberg, and FactSet Oct 2013
For institutional use only. Not for distribution to retail investors.
12
Efficient Frontier Relative to Typical SMSF:
equities selected from broad-based index
We looked at Vanguard diversified funds
vs. typical SMSF relative to efficient
frontier
•
Vanguard diversified funds located
close to theoretically optimal portfolios
defined by efficient frontier
•
Typical SMSF far from efficient
frontier (i.e., additional risk not
compensated by extra returns)
•
Large risk-return spread in cloud of
SMSF returns arises from selection
risk
Source: Vanguard, Bloomberg, and FactSet Oct 2013
For institutional use only. Not for distribution to retail investors.
13
What do the risk and returns simulations tell us?
•
Typical SMSF performed well during GFC – so why the high risk profile?
•
Key drivers of risk are:
•
Selection risk - leads to large spread of return paths
•
Equity concentration risk – no. of securities; home country bias, low levels of international
exposure
•
Typical SMSF inefficient from risk-adjusted return perspective
(cash drag reduces return & equity concentration, home country bias
increases risk)
•
Are trustees conscious of risk within typical portfolio profiles?
•
Conversation starter for brokers/advisers with clients on risk (vs reward) and value of strategic
asset allocation and diversification
•
What is the solution?
For institutional use only. Not for distribution to retail investors.
14
Vanguard ETFs on the ASX
For institutional use only. Not for distribution to retail investors.
15
Vanguard’s current range of ETFs
FIXED INCOME
PROPERTY
AUSTRALIAN SHARES
INTERNATIONAL SHARES
Vanguard
Fixed
Interest
Index ETF
Vanguard
Australian
Government
Bond Index
ETF
Vanguard
Australian
Property
Securities
Index ETF
Vanguard
Australian
Shares
Index ETF
Vanguard
Australian
Shares
High Yield
ETF
Vanguard
MSCI
Australian
Large
Companies
Index ETF
Vanguard
MSCI
Australian
Small
Companies
Index ETF
Vanguard
US Total
Market
Shares
Index ETF
Vanguard
All-World
ex-US
Shares
Index ETF
Vanguard
FTSE
Emerging
Markets
Shares ETF
ASX
code
VAF
VAF
VGB
VAP
VAP
VAS
VAS
VHY
VHY
VLC
VLC
VSO
VTS
VTS
VEU
VGE
VGE
MER p.a.
0.20%
0.20%
0.25%
0.15%
0.25%
0.20%
0.30%
0.05%
0.15%
0.48%
Index
UBS
Composite
Bond
Index™
UBS
Government
Bond Index
S&P/ASX
300 A-REIT
Index
S&P/ASX
300 Index
FTSE
ASFA
Australia
High
Dividend
Yield Index
MSCI
Australian
Shares
Large Cap
Index
MSCI
Australian
Shares
Small Cap
Index
CRSP US
Total
Market
Index
(AUD)
FTSE
All-World
ex-US
Index
(AUD)
FTSE
Emerging
Index
(AUD)
ETF
name
Data as at 21 March 2014
For institutional use only. Not for distribution to retail investors.
16
Building an international equity portfolio in two ASX trades
VTS
50%
VEU
50%
Two trades:
• Build out a major asset class
• Over 5,800 securities
• Over 40 developed and emerging market
• Exxon, Apple, Microsoft, Johnson & Johnson,
Nestle, HSBC, General Electric
• Weighted Management costs of 10 bps
economies
Source: MSCI Inc. and Vanguard Australia
For institutional use only. Not for distribution to retail investors.
17
Lowering portfolio risk, increasing diversification
22.0
21.5
VTS
20%
VEU
20%
21.0
Australian
large caps
60%
20.5
20.0
19.5
19.0
18.5
18.0
7
8
9
10
11
12
13
• 2yr standard deviation falls 27%
• Expanded value proposition
• Build out fixed income, property, small ords, high yield…
For institutional use only. Not for distribution to retail investors.
Source: Morningstar Direct and Vanguard Australia. As at March 31 2014.
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Lowering portfolio risk, increasing diversification
11.0
MSCI ACWI
20%
Australian
large
caps
UBS Comp
60%
20%
10.5
Australian
large caps
60%
10.0
9.5
9.0
7
8
9
10
11
12
13
14
• 3yr standard deviation falls 36%
• Expanded value proposition
• Build out property, small ords, high yield…
19
For institutional use only. Not for distribution to retail investors.
Source: Morningstar Direct and Vanguard Australia
Vanguard ETF talking points
For institutional use only. Not for distribution to retail investors.
20
Australian shares – small companies
ETF name
Vanguard MSCI Australian Small
Companies Index ETF
(ASX Code: VSO.AXW)
Index
MSCI Australian Shares Small Cap
Index
Management costs
0.30% p.a.
Average spread
0.18%
ASX listing date
26 May 2011
AUM
$40.9m
No. Securities in ETF
166
Top 5 holdings
Challenger, Bluescope Steel,
Ansell, Commonwealth Property
Office, Duet Group
Distribution. (DRP?)
Semi-annually (DRP)
Large cap %
0.00
Mid cap %
64.06
Small cap %
35.94
1 year return
1.09%
1 year index return
1.23%
Cash
International
fixed interest
VHY
Australian
Australian
Australian
Shares
Shares
Shares
Australian
fixed interest
VSO
Emerging
markets
Listed property
International
shares
Note: The asset allocations in this diagram are examples only and do not represent
a recommendation
All data as at 31 March 2014.
For institutional use only. Not for distribution to retail investors.
21
International shares - US shares
ETF name
Vanguard US Total Market
Shares Index ETF
(ASX code: VTS.AXW)
Index
CRSP US Total Market Index
Management costs
0.05% p.a.
Average spread
0.19%
ASX listing date
12 May 2009
AUM (ETF/fund)
A$44.7b (A$349.3b)
No. Securities in ETF
3,698
Top 5 holdings
Apple Inc., Exxon Mobil Corp,
Google Inc., Microsoft Corp.,
General Electric Co.
Distribution. (DRP?)
Quarterly (No DRP)
Large cap %
72.09
Medium cap %
19.28
Small cap %
8.63
1 year return
38.00%
1 year index return
38.02%
3 year return
18.91% p.a.
Cash
International
fixed interest
Australian
Shares
Australian
fixed interest
VSO
Emerging
markets
Listed property
VTS
International
shares
Note: The asset allocations in this diagram are examples only and
do not represent a recommendation
For institutional use only. Not for distribution to retail investors.
All data as at 31 March 2014.
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VTS advantage: achieve broad diversification at lower cost
VTS
CRSP US Total
Markets Index
(broad)
IVV
S&P500
MER % p.a
VTS
IVV
0.05
0.07
Index
CRSP US
Total Market
S&P 500
Annualised return
9.32%
8.54%
Annualised risk
14.9%
14.3%
Market coverage
99.5%
81%
•
•
•
•
•
Large cap
Mid cap
Small cap
Micro cap
Large cap
US broad, large, mid and small cap calendar year performance from 2000 to 2013
For institutional use only. Not for distribution to retail investors.
Summary performance statistics from May 2003 to December 2013. (May 2003 is when the CRSP index’s inception)
Summary performance statistics from May 2003 to December 2013. (May 2003 is when the CRSP index’s inception)
23
Australian property securities
ETF name
Vanguard Australian Property
Securities Index ETF
(ASX code: VAP.AXW)
Index
S&P/ASX 300 A-REIT Index
Management costs
0.25% p.a.
Average spread
0.13%
ASX listing date
15 October 2010
AUM (ETF/fund)
$166.9m ($2,892.9m)
No. Securities in ETF
28
Top 5 holdings
Westfield, Westfield,Retail Trust,
Stockland, Goodman Group, Mirvac
Distribution. (DRP?)
Quarterly (DRP)
Large cap %
61.04
Mid cap %
34.50
Small cap %
4.46
1 year return
4.86%
1 year index return
4.96%
Cash
International
fixed interest
Australian
Australian
Shares
Shares
Australian
fixed interest
VSO
VAP
Emerging
markets
Listed property
International
shares
All data as at 31 March 2014.
For institutional use only. Not for distribution to retail investors.
Note: The asset allocations in this diagram are examples only and do not
represent a recommendation
24
Australian fixed interest
ETF name
Vanguard Australian Fixed
Interest Index Fund
(ASX code: VAF.AXW)
Index
UBS Composite Bond Index
Management costs
0.20% p.a.
Average spread
0.27%
ASX listing date
31 October 2012
AUM (ETF/fund)
$31.3m ($3,686.3m)
No. Securities in ETF
422
No. Issuers in ETF
154
Distribution. (DRP?)
Quarterly (DRP)
Yield to maturity
3.61%
Effective duration (yrs)
4.16
1 year return
3.18%
1 year index return
3.33%
Cash
International
fixed interest
Australian
fixed interest
VAF
Australian
Shares
VSO
Emerging
markets
Listed property
International
shares
Note: The asset allocations in this diagram are examples only and do not represent
a recommendation
All data as at 31 March 2014.
For institutional use only. Not for distribution to retail investors.
4,314 stocks and bonds in 4 trades
25
Next steps…
For institutional use only. Not for distribution to retail investors.
26
Next steps…
• Vanguard has the largest financial adviser support team in Australia
• We can help you:
– have the ‘why Vanguard’ conversation with clients
– discuss the benefits of ETFs in investment portfolios
– articulate talking points on individual Vanguard ETF exposures
For institutional use only. Not for distribution to retail investors.
27
Appendix
For institutional use only. Not for distribution to retail investors.
28
Trading tips
• Do your homework
– What is the iNAV?
– What are typical spreads?
– What are spreads for the managed fund?
• Don’t trade during market open and market close
• Use “limit” orders
• On-screen volume is an indication of price, not the additional liquidity available
For ETF trade execution assistance,
contact our ETF Help Desk:
1300 655 888
For institutional use only. Not for distribution to retail investors.
29
A starting point: The iNAV
Product
iNAV Code
VAS.AXW
VASINAV.ETF
VHY.AXW
VHYINAV.ETF
VLC.AXW
VLCINAV.ETF
VSO.AXW
VSOINAV.ETF
VAP.AXW
VAPINAV.ETF
VGB.AXW
VGBINAV.ETF
For institutional use only. Not for distribution to retail investors.
30
Disclosures – General advice warning
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (“Vanguard”) is the product
issuer.
This presentation contains general information and is intended to assist you. We have not taken anybody's
circumstances into account so the information may not be applicable to your circumstances or those of any other
person. This presentation was prepared in good faith and we accept no liability for any errors or omissions.
You should consider your circumstances or those of any other relevant person, and the relevant Product
Disclosure Statement (PDS), before making an investment decision or recommendation. You can access our
PDS at www.vanguard.com.au or by calling 1300 655 102.
Past performance is not an indication of future performance. Unless otherwise indicated, Vanguard pays a fee for
access to the data used in this presentation but did not commission the research.
"Vanguard", "Vanguard Investments", and the ship logo are the trademarks of The Vanguard Group, Inc.
© 2014 Vanguard Investments Australia Ltd. All rights reserved.
For institutional use only. Not for distribution to retail investors.
31
Important information
This presentation contains general information and is intended to assist you. In preparing the above information, individual circumstances, for example tax implications, have not
been taken into account and it may, therefore, not be applicable to an individual’s situation. Before making an investment decision, you should consider your circumstances and
whether the above information is applicable to your situation.
Past performance is not an indication of future performance. Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (“Vanguard”) is the issuer of the
Vanguard® Australian ETFs. Vanguard is the issuer of the Prospectus on behalf of the US listed ETFs described in the Prospectus. Vanguard has arranged for interests in the US
ETFs to be made available to Australian investors via CHESS Depositary Interests that are quoted on the AQUA market of the Australian Securities Exchange (“ASX”).
Vanguard ETFs will only be issued to Authorised Participants, that is persons who have entered into an Authorised Participant Agreement with Vanguard. Retail investors can
transact in Vanguard ETFs through a stockbroker or financial adviser on the secondary market.
Investors should consider the relevant Prospectus and/or Product Disclosure Statement (“PDS”) in deciding whether to acquire Vanguard ETFs. Retail investors can only use the
Prospectus and PDS for informational purposes. You can access the PDS and/or Prospectus at vanguard.com.au
Vanguard is not offering the Vanguard FTSE Emerging Markets Shares ETF in the United States and this presentation does not constitute an offer or an invitation to apply for or
acquire any interests in the International ETFs in the United States. The information contained in this presentation is not intended for US persons as defined in Regulation S under
the US Securities Act.
Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC ("S&P") and ASX® is a registered trademark of the Australian Securities
Exchange Limited (“ASX”). These trademarks have been licensed for use by The Vanguard Group, Inc. Vanguard's ETFs are not sponsored, endorsed, sold or promoted by S&P or
ASX, and S&P and ASX make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in the Vanguard ETFs.
The funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For any such
funds or securities, the Prospectus contains a more detailed description of the limited relationship MSCI has with Vanguard and any related funds.
“FTSE®” is a trademark of the London Stock Exchange Group companies (LSEG) and is used by FTSE International Limited under license. "All-World" is a trade mark of FTSE
International Limited. The FTSE All-World ex US Index and the FTSE Emerging Index are calculated by FTSE. FTSE does not sponsor, endorse or promote this product and is not in
any way connected to it; and does not accept any liability in relation to its issue, operation and trading. All rights in the FTSE ASFA Australia High Dividend Yield Index (the “Index”)
vest in FTSE International Limited (“FTSE”) and The Association of Superannuation Funds of Australia (“ASFA”). “ASFA™”is a trade mark of ASFA. The Vanguard Australian Shares
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and do not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Index or (b) investment in or operation of the ETF. Neither FTSE
nor ASFA make any claim, prediction, warranty or representation either as to the results to be obtained from the ETF or the suitability of the Index for the purpose to which it is being
put by Vanguard.
The marks and names "UBS Government Bond Index"and "UBS Composite Bond Index™" a are proprietary to UBS AG ("UBS"). Any use of these indices or the index names must
be with the express written consent of UBS AG acting through its Australia Branch. UBS has agreed to the use of, and reference to the "UBS Government Bond Index" and "UBS
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endorsed or promoted by UBS. UBS assumes no responsibility for this website material or the ETFs. Vanguard assumes sole responsibility for producing this website material, which
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© 2014 Vanguard Investments Australia. All rights reserved.
For institutional use only. Not for distribution to retail investors.
32