Tuesday 6 August 2013

Why I can't recommend Vanguard for Australian Superannuation (yet)

I've been asked a couple of times about using Vanguard as a core provider of retirement investments. Almost everything you read on the Internet on index funds will quite reasonably mention Vanguard, the originators of index funds.  However most of these articles are focused on US investors and US products.

Vanguard are a great company with some great products.  So why don't I think they're suitable for many Australian investors as the core of their Superannuation?

Unfortunately their lowest-cost funds are only available in self-managed superannuation funds, direct investment options like ING Living Super and some wrap accounts.  ING Living Super comes with additional fees for ETF investment and restricts customers to 20% within a single exchange traded fund, so a Vanguard ETF-focused asset allocation is quite restricted in terms of options (although mixing with iShares and other index ETFs makes this a viable strategy).  Self managed superannuation funds and wrap accounts do not have this limitation but tend to be quite costly unless you have a larger account balance.

The largest drivers of recommendations of Vanguard elsewhere are their wide diversification and low costs. In Superannuation in Australia there are similarly diversified index funds at substantially lower cost. So until Vanguard are able to offer better pricing over here, the only Vanguard products I'll be purchasing from them are their ETFs (in my case, outside of Super). If my balance was large enough I might include some of those ETFs in my super to complement other index funds with their low fees. But looking at the alternatives, their retail ("unit trust") managed funds just aren't price-competitive over here.

Links:
ING Living Super: ETFs
Vanguard ETFs
Vanguard Retail Managed Funds (<$500,000)

4 comments:

  1. Hi S(a)F,

    Thanks for another great post. I'm intrigued by your point about Vanguard's retail managed funds. I've been seriously considering investing in one of these funds as a way to get started in index investing outside of super. I'm definitely sold on the idea of indexing, so my key choice is between managed index funds (vanguard) or ETFs (broker + vanguard, ishares, blackrock etc).

    As I see it, although the 0.9% MER on most of these funds is quite high in comparison to ETFs (0.1-0.2%), the cost of monthly, quarterly or even 6-monthly brokerage fees being taken out of my low-balance "beginners" portfolio seem to make index funds the cheaper option in the short term. (After my balance has accumulated though, I think the fixed price of dollar-cost averaging into buy-and-hold ETFs would eventually become cheaper than the high % cost of the index funds.)

    Although you don't see Vanguard's funds as a good option within super, do you think they have any value (particularly in relation to ETFs) for a beginner investor outside of super?

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    1. Hi Ben,

      With ETFs there are a couple of strategies that I use (which may not suit everyone). In general I expect to leave investments in ETFs for many years so brokerage tends not to be a large overall cost p.a.

      I tend to wait until I have at least $5000 in an online savings account before investing in an ETF, so that brokerage doesn't wipe out the savings. The downside is that I'm not invested in the market in the interim. You can stagger the investment if you are splitting things up between different asset classes such as Australian Shares and International Shares, so for example first invest in one ETF, then the next when you have built up again.

      I've also noticed recently that many of the online brokerages owned by banks have free brokerage when you sign up (generally for 10-12 trades over the first three months), such as this one: http://www.investing.commsec.com.au/homeoffer

      I've used the commsec offer recently to switch from Vanguard Managed Funds to Vanguard ETFs without it costing much. There are similar offers from NAB, Westpac etc. so if they're still on offer in a year I might do it again. Obviously they expect you to keep trading (and if you invest in too many different funds it can get expensive if you do want to sell them).

      What concerns me more than ETFs is that I'm starting to see other managed fund providers offer lower fees than Vanguard for very similar products. I haven't done an exhaustive search but have already found Colonial have index funds for 0.41%-0.53% p.a. MER with a $5,000 initial investment (or $1,000 plus $100 per month ongoing contribution) and no minimum additional investment. Vanguard's execution (and tracking error) may be a little better but it's hard to overcome such a fee advantage (as Vanguard themselves have proven in the US). Something like this (and there may be even lower-fee options out there - I haven't searched exhaustively) or Vanguard's equivalent may indeed be a good way of starting out while building up to larger ETF investments as you can put in smaller/more regular amounts.

      Note that even with Colonial or Vanguard's managed fund investments there are still 'trading' costs in the buy-sell spread (of the order of 0.1-0.3%) so it's still probably worth sticking with a product for a number of years (if moving investments around regularly those costs will mount up). When I started using index funds we didn't have access to the range of ETFs available now for International Shares (and Hedged International Shares only became available as an ETF in the last few months) so I had $3,000-$6,000 at various times in the two Vanguard International Shares funds. I've only just sold them to replace them with ETFs last month. I have to say that Vanguard (and probably other large managed fund providers like Colonial) do make life a little easier in terms of tax statements, etc. When I sold they even sent me an indication of the capital gains since original investment, where for ETFs I'd need to keep track of that (which I should do anyway).

      Colonial: 'Wholesale Investments'
      http://www.colonialfirststate.com.au/forms_tools/download_multi_pdf.asp?name=FirstChoice+Wholesale+Investments+PDS&pdf=FS1492.pdf,FS1495.pdf,FS5111.pdf,FS5137.pdf&LiteratureId2130

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    2. Canadian couch potato expands on your idea: http://canadiancouchpotato.com/2012/03/05/some-advice-for-new-potatoes/

      He points out that when our balance is small, our contributions will have much more impact than investment returns. So having investments that allow for easy regular contributions at a reasonable cost may indeed be a better option than targeting the lowest annual fees through ETFs when your balance is low (particularly given brokerage costs).

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