Michael Lovett
Head of Distribution
Vanguard
ETF growth in Australia
0
20
40
60
80
100
120
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
#
of
E
T
P
s
V
al
ue i
n
A
$m
Aus Market Cap: $15,925,100,000 bn
New ETF’s
Vanguard MSCI Index International Shares
ETF (VGS)
Vanguard MSCI Index International Shares
(Hedged) ETF (VGAD)
Investment
Objective
To track the return of the MSCI World
ex-Australia (with net dividends reinvested), in
Australian dollars Index, before taking into
account fees, expenses and tax.
To track the return of the MSCI World ex-Australia
(with net dividends reinvested) hedged into
Australian dollars Index before taking into account
fees, expenses and tax.
ASX Code
VGS
VGAD
Fees p.a.
0.18% p.a.
0.21% p.a.
Distributions
Quarterly
Semi-annually
DRP
Yes
Yes
Global outlook: Are we stuck in second gear?
Alexis Gray
Economist
Global recovery to continue, but expect slower economic growth than
past decades
Low interest rates and inflation to persist
Global fixed income – muted returns, but no “bubble”
Positive equity outlook is more guarded (in some places)
Real GDP growth (%year over year)
Economic growth slowing
0
1
2
3
4
5
6
7
8
9
10
China
India
Australia
United
States
United
Kingdom
Brazil
Canada
Eurozone
Russia
Japan
Inflation (%year over year)
Inflation pressures easing
0
1
2
3
4
5
6
7
8
9
10
Russia
India
Brazil
China
United
States
Australia
United
Kingdom
Euro area
Canada
Japan
Supply
Demand
Long term
Medium term
Why are the major economies slowing down?
Financial
crisis
overhang
Unfavourable
demographics
Global
slowdown
Productivity
growth
slowdown
Business and consumer deleveraging
Government austerity
Monetary policy ineffectiveness
Income inequality
Assessing drivers of the economic slowdown
Japan
Euro
area
United
States
Australia
China
United
Kingdom
Canada
Somewhat significant factor
Factor not present
Highly significant factor
Population growth slowdown
Productivity growth slowdown
High unemployment
Business investment slowdown
Assessing drivers of the economic slowdown
Japan
Euro
area
United
States
Australia
China
United
Kingdom
Canada
Somewhat significant factor
Factor not present
Highly significant factor
Relative to history, we can expect:
Implications of economic slowdown
Slower economic growth
Lower inflation
Investment markets
Portfolios
Implications for investment markets and portfolios
Lower interest rates / bond yields
Lower expected bond market
returns
Elevated equity valuations
Lower expected equity market
returns
Higher probability of market
volatility
Bond market projections
10 year annualised return
Historical average
3.8%
3.5%
3.7%
2.0%
Australian Bonds
Global Bonds ex-Australia hedged in AUD
Australian Cash
10 year annualised return
Equity market projections
Historical average
6.4%
7.2%
8.4%
Global Equity ex-Australia unhedged in AUD
Australian Equity
Balanced portfolio projections
Note: Forecast displays the 5th/25th/75th/95th percentile range of 10,000 simulations from VCMM for projected nominal returns for balanced portfolios in AUD as of
10 year annualised return
History 1958-2014
History 2000-2014
4.6%
7.9%
6.9%
Global recovery to continue, but expect slower economic growth than past
decades
Low interest rates and inflation to persist
Global fixed income – muted returns, but no “bubble”
Positive equity outlook is more guarded (in some places)
Summary
Quantifying Adviser’s Alpha™
Fran Kinniry
Principal
Vanguard Investment Strategy Group
The Vanguard Group
The traditional value proposition for financial advisers has been primarily focused
on outperformance
As such, this value proposition has extremely high hurdles
•
Requires tremendous alpha to overcome fees and taxes
•
Expected outperformance has not been achieved for vast majority
Result: lower asset retention rates
Vanguard Adviser’s Alpha framework emphasises the more reliable benefits of a
professional relationship
Vanguard’s Adviser’s Alpha
Success not solely on outperforming
What is the Adviser’s Alpha concept?
The focus:
Holistic advisory model
Adviser’s Alpha: reframes the benchmark for the value of advice
Investment
management
Wealth management
A service model:
Time, willingness and
ability
Behavioural coaching
How much and
by what methods
The value of an adviser:
Quantification of Vanguard Adviser’s Alpha
Source: Francis M. Kinniry Jr. CFA, Colleen M. Jaconetti, CPA, CFP®, Paul W. Chin, F Fin, Frank Polanco, PhD, CFA,and Yan Zilbering 2015. Putting a value
Vanguard Adviser’s Alpha strategy
Value-add relative to ‘average’
client experience (in basis
points of return)
1. Suitable asset allocation
2. Cost (expense ratios)
3. Rebalancing
4. Behavioural coaching
5. Tax efficiency
6. Total-return vs income investing
Potential value added
>0 bps
75
42
150
>0
>0
“About 3%”
Asset allocation - Simplicity has been very competitive
Comparing performance of superannuation funds and a diversified portfolio
- Australian analysis
Australian asset-weighted expense ratios versus “low-cost” investing
Cost-effective implementation - Expense ratios
Equities/Bonds mix
100%/0%
50%/50%
0%/100%
Asset-weighted expense ratio (Indirect
Cost Ratio – ‘ICR’)
1.03%
“Lowest of the low”
Cost-effective implementation
(ICR bps)
0.74%
0.44%
0.28
0.75
0.24
0.50
0.19
0.25
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
J
u
n-97
J
u
n-99
J
u
n-01
J
u
n-03
J
u
n-05
J
u
n-07
J
u
n-09
J
u
n-11
J
u
n-13
A
lloc
at
ion A
m
ong
A
s
s
et
C
las
s
es
(
%
)
38%
53%
45%
55%
47%
54%
Rebalancing - Asset allocations show trend following
Hypothetical example of investor behaviours and their advisers over time
Max
Min
Median
Sep-14
Equity
56.1%
37.6%
51.6%
54.5%
Fixed Interest
31.0%
18.9%
22.4%
22.1%
Property & Infrastructure
14.1%
8.1%
10.6%
10.3%
Cash
22.3%
12.2%
14.3%
13.1%
Remember when…
Rebalancing and “staying the course” have the potential to
cover years of an advisory fee
Source: Vanguard Investment Strategy Group using data sourced from FactSet to Dec 2014. Notes: 1 Nov 2007 represents the EQ peak of the period, and has
40
60
80
100
120
140
160
Nov-07
Nov-09
Nov-11
Nov-13
Por
tfolio
va
lue
, In
de
x = 1
00
at
N
ov
20
07
50% EQ/50% AFI
100% Aus Bonds
100% Cash
Market bottom = 6 Mar 2009
44%
81%
24%
From trough to now
-18.4%
P
or
tf
ol
io
v
al
ue,
I
ndex
=
100 at
N
ov
2007
Behavioural coaching - Overview
Numerous studies conclude
behavioural coaching can add
1 to 2 percentage points
Investors commonly receive
much lower returns from the
funds in which they invest
This drag is significantly more
pronounced for more
concentrated or narrow funds
This drag is much lower for
broad index funds
The
discipline
&
guidance
through
behavioural coaching
could be the largest
potential value-add of
the tools available
Behavioural coaching - Performance chasing is not limited
to asset classes but to managers as well
-150
-100
-50
0
50
100
150
200
250
1 year
3 year
5 year
C
u
m
u
lat
ive cash
f
lo
w
s
(
U
S
$
b
illio
n
s
)
5-star
4-star
3-star
2-star
1-star
-136
-122
-98
-69
-6
-150
-130
-110
-90
-70
-50
-30
-10
10
5-star
4-star
3-star
2-star
1-star
A
n
n
u
al
ised
36
-m
o
n
th
excess
ret
u
rn
s
(b
asi
s
p
o
in
ts)
High ratings have not led to future
outperformance
Cash flows are associated with
performance rankings
The result - Investor returns lag the returns of the markets
and the funds in which they invest
Difference between 10-year investor and fund returns in Australia
-5.2%
-7.9%
-1.4%
-1.4%
-1.7%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Equity Australia
Large: 138
Equity Australia
Mid/Small: 35
Equity World Large:
73
Equity World
Mid/Small: 8
Multisector: 198
R
et
ur
n di
ff
er
enc
e
bet
w
een
T
W
R
and I
R
R
%
Adviser’s alpha
Index as the core can have many advantages
% of active funds underperforming the average market return over 5 years
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Aus Equities
Broad
Aus Equities -
Small Cap
Intl Equities
Aus Bonds
Aus Listed
Property
Securities
%
of
ma
na
ger
s under
per
for
mi
ng
thei
r benc
hm
ark
%
of
m
anag
er
s
under
per
for
m
ing
thei
r benc
hm
ar
k
Index as the core minimises the risk of losing clients by
“shrinking the distribution”
Underperformance often matters more than outperformance
Deviates from market-cap
1. Client asks questions
2.
Client pulls some assets
3.
Client pulls most assets
Index as the core minimises the risk of losing clients by
“shrinking the distribution”
Client asks questions
Client pulls some assets
Client pulls most assets
Client pulls all assets
Underperformance often matters more than outperformance
Resembles market-cap
1. Client asks questions
2.
Client pulls some assets
3.
Client pulls most assets
Annuitising your practice
Trying to
get here
-5%
-3%
-1%
1%
3%
5%
7%
9%
11%
13%
15%
0
1
2
3
4
5
6
7
8
9
10
C
lie
n
t p
ro
fit
Working with an adviser can add “
about 3%
” in net returns by
following the Vanguard Adviser’s Alpha framework
While the value of this wealth creation is certainly real, it does
not show up on any client statement
The Vanguard Adviser’s Alpha framework is not only good for
your clients but also good for your practice
The power of low cost index investments
Example: $250,000 portfolio
Vanguard Diversified funds
Asset Allocations (%)
Vanguard
®Balanced Index Fund
Vanguard
®Growth Index Fund
Australian Shares
22
31
International Shares
22
31
Property
6
8
Fixed Interest
50
30
Cash
0
0
Vanguard’s growth ETF portfolio strategy – Asset allocation
Managed
Fund
ETF
Allocation
MER*
(p.a.)
Income
Australian fixed income
VAF
12%
0.20%
International fixed income
VAN0103AU
112%
0.26%
International credit securities
VAN0106AU
16%
0.34%
Total Income
30%
Growth
Domestic equity
VAS
31%
0.15%
International equity
VTS
VEU
17%
18%
0.05%
0.15%
Property
VAP
4%
0.25%
Total
Growth
70%
Portfolio weighted management
expense ratio p.a.
0.17%
Growth
30%
70%
Thank you
Connect with Vanguard
®
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and responsible entity of the interests in the Vanguard Wholesale Funds and the Vanguard Investor Index Funds. We have not taken your circumstances into account when preparing [the information] so it may not be applicable to your circumstances. You should consider your circumstances and our Product Disclosure Statements (“PDSs”) before making any investment decision. You can access our PDSs at vanguard.com.au or by calling 1300 655 101. Past performance is not an indication of future performance. This publication was prepared in good faith and we accept no liability for any errors or omissions.
Vanguard pays a fee to access subscription data. All marks are the exclusive property of their respective owners.
© 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), a subsidiary of Morningstar, Inc, without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant Product Disclosure Statement before making any decision to invest. Neither Morningstar, nor Morningstar’s subsidiaries, nor Morningstar’s employees can provide you with personalised financial advice. To obtain advice tailored to your particular circumstances, please contact a professional financial adviser. Please refer to Morningstar’s Financial Services Guide (FSG) for more information
www.morningstar.com.au/s/fsg.pdf.
S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”) and ASX is a registered trademark of ASX Operations Pty Limited (“ASX”) and such marks have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by The Vanguard Group, Inc. The [S&P/ASX 300 index] is a product of S&P Dow Jones Indices LLC and has been licensed for use by The Vanguard Group, Inc. Vanguard ETFs are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, S&P, ASX or their respective affiliates, and none of S&P Dow Jones Indices LLC, S&P, ASX nor their respective affiliates makes any representation regarding the advisability of investing in such product(s). 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.
BLOOMBERG and the Bloomberg AusBond Composite Index and Bloomberg AusBond Bank Bill Index are trademarks or service marks of Bloomberg and have been licensed to Vanguard. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to the Bloomberg AusBond Composite Index and Bloomberg AusBond Bank Bill Indexes.
Interests in the Vanguard Wholesale Funds and the Vanguard Investor Index Funds are offered through a Product Disclosure Statement (“PDS”) only. Vanguard is the issuer of the Vanguard® Australian exchange traded funds (“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. Retail investors can transact in Vanguard ETFs through a stockbroker or financial adviser on the secondary market. Investors should consider the Prospectus and PDS in deciding whether to acquire Vanguard ETFs. Retail investors can only use the Prospectus and PDS for informational purposes. The funds or securities referred to in [this document] are not sponsored, endorsed or promoted by MSCI and MSCI bears no liability with respect to any such funds or securities.
The [Product Disclosure Statement, Prospectus or Statement of Additional Information] contains a more detailed description of the limited relationship MSCI has with The Vanguard Group and any related funds. All rights in the Vanguard All-World ex-US Shares Index ETF (the “Index”) vest in FTSE International Limited (“FTSE”). “FTSE®” is a trademark of London Stock Exchange Group companies and is used by FTSE under licence. The Vanguard All-World ex-US Shares Index ETF (the “Product”) has been developed solely by Vanguard. The Index is calculated by FTSE or its agent. FTSE and its licensors are not connected to and do not sponsor, advise, recommend, endorse or promote the Product 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 Product. FTSE makes no claim, prediction, warranty or representation either as to the results to be obtained from the Product or the suitability of the Index for the purpose to which it is being put by Vanguard.