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How To Invest In Vanguard Index Funds (International)

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(1)
(2)

Michael Lovett

Head of Distribution

Vanguard

(3)
(4)

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

(5)

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

(6)

Global outlook: Are we stuck in second gear?

Alexis Gray

Economist

(7)

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)

(8)

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

(9)

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

(10)

Supply

Demand

Long term

Medium term

Why are the major economies slowing down?

Financial

crisis

overhang

Unfavourable

demographics

Global

slowdown

Productivity

growth

slowdown

(11)

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

(12)

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

(13)

Relative to history, we can expect:

Implications of economic slowdown

Slower economic growth

Lower inflation

(14)

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

(15)

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

(16)

10 year annualised return

Equity market projections

Historical average

6.4%

7.2%

8.4%

Global Equity ex-Australia unhedged in AUD

Australian Equity

(17)

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%

(18)

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

(19)

Quantifying Adviser’s Alpha™

Fran Kinniry

Principal

Vanguard Investment Strategy Group

The Vanguard Group

(20)

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

(21)

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

(22)

How much and

by what methods

(23)

The value of an adviser:

(24)

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%”

(25)

Asset allocation - Simplicity has been very competitive

Comparing performance of superannuation funds and a diversified portfolio

- Australian analysis

(26)

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

(27)

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%

(28)

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

(29)

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

(30)

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

(31)

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

%

(32)

Adviser’s alpha

(33)

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

(34)

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

(35)

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

(36)

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

(37)

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

(38)

The power of low cost index investments

Example: $250,000 portfolio

(39)

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

(40)

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

1

12%

0.26%

International credit securities

VAN0106AU

1

6%

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%

(41)
(42)

Thank you

Connect with Vanguard

®

(43)

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.

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