I've posted some of this before but was about to use it elsewhere. I thought it might be a good summary to keep here too. I greatly appreciate any feedback - I know it's not the easiest read.
Sunday, 21 September 2014
Saturday, 20 September 2014
Australian Super, MySuper and the fee debates
In my last post I noted that AustralianSuper's fees on their Indexed Diversified option increased last year. While this was disappointing, we should keep things in perspective and look at the big picture.
At the end of the day, 0.21% p.a. is still extremely inexpensive for a well-diversified set of index funds. Other than the the exceptional offering from HostPlus there's really nothing better in the marketplace. And a cursory investigation into the availability of automatic insurance on joining suggests that AustralianSuper has more to offer if you want to have Life and TPD insurance in your super and want to minimise the hassle of a screening process (unless your employer uses HostPlus as their default - lucky you!) For my Mum I've recommended HostPlus as she doesn't need such insurance at this stage. For my partner I'm more likely to suggest AustralianSuper.
This had me thinking more generally about where we are in Australia with fees on Superannuation funds. Since the introduction of MySuper funds at the start of the year fees on average don't appear to have dropped that much. But it is a start - fees on default products have improved but there are still a lot of legacy products and expensive products left in the marketplace.
As an indicator, the big banks all have basic Super products with asset-based fees in the range of 0.5% - 0.8% p.a. Even AMP now has a MySuper product at 0.65% p.a. (but be aware that any customisation at AMP becomes increasingly expensive). While that's still more than HostPlus or AustralianSuper it's a vast improvement in just a few years.
So if things have improved, what are the big (and smaller) fee issues out there now?
Firstly, existing balances in default products don't have to be converted to MySuper products until 2017. This gives unscrupulous funds some time to extract more in fees. There even appears to be cases where a separate company has been set up with a more competitive MySuper fund. What this means is that existing balances can't be rolled into the more competitive fund automatically, giving another opportunity to get/keep people in less competitive funds.
Secondly, there is the potential for high fees to be charged by affiliated planners to put consumers into higher-fee funds. It is unclear how widespread this is or will be. But the bottom line is if you're paying more than 1% p.a. you'd better be very clear on what value you're getting for that money. There are places where a financial planner can add value. But by itself choosing an asset allocation should not be that expensive or needed so frequently that you're paying an annual fee. What my parents did was to see a planner associated with one of their industry funds, pay up-front (still much less than 1% as a once-off) for a financial plan when they were close to retirement, and pay a few hundred dollars for a follow-up every few years when needed.
Thirdly, perhaps a smaller issue, is fees versus value. I'm unconvinced of the value of active management of equities, and there's plenty of evidence to support that particularly for the large stocks that form the majority of equities in Super. But accessing assets like unlisted infrastructure and property are a more expensive proposition and may provide some diversification benefits. Reasonable people can disagree on whether it is worth paying a bit more for these. However it is clear that fees of 2% p.a. as still exist in some retail products will almost never be worth paying; they will struggle to overcome the drag of those fees and there are just better-value products in the market.
So if you want such assets in your Super, I won't judge you (I even had posts on some in the past). Just include them in a cost-effective manner. For example, Australian Super's Conservative Balanced fund (which doesn't seem all that conservative) charged 0.41% + 0.03% in performance fees last year and has a target ('strategic asset allocation') of 25% in Direct Property and Infrastructure. That's the best value I've found for such an allocation but most Industry Super funds will have a reasonable quantity of Property and Infrastructure while keeping fees in-line with the banks' pure index products (and as with Australian Super many can beat the banks on pure index products for those of us so inclined). And if you want something in-between, a mix of AustralianSuper's Conservative Balanced and Index DIversified funds can be used. For example 40% Conservative Balanced and 60% Index Diversified will get you a target allocation of 10% in unlisted assets. All for about 0.3% p.a.
Fees might not be everything but they can make a big difference to the final balance which funds your retirement income. Be aware of what you are paying and make sure you are getting value for money.
At the end of the day, 0.21% p.a. is still extremely inexpensive for a well-diversified set of index funds. Other than the the exceptional offering from HostPlus there's really nothing better in the marketplace. And a cursory investigation into the availability of automatic insurance on joining suggests that AustralianSuper has more to offer if you want to have Life and TPD insurance in your super and want to minimise the hassle of a screening process (unless your employer uses HostPlus as their default - lucky you!) For my Mum I've recommended HostPlus as she doesn't need such insurance at this stage. For my partner I'm more likely to suggest AustralianSuper.
This had me thinking more generally about where we are in Australia with fees on Superannuation funds. Since the introduction of MySuper funds at the start of the year fees on average don't appear to have dropped that much. But it is a start - fees on default products have improved but there are still a lot of legacy products and expensive products left in the marketplace.
As an indicator, the big banks all have basic Super products with asset-based fees in the range of 0.5% - 0.8% p.a. Even AMP now has a MySuper product at 0.65% p.a. (but be aware that any customisation at AMP becomes increasingly expensive). While that's still more than HostPlus or AustralianSuper it's a vast improvement in just a few years.
So if things have improved, what are the big (and smaller) fee issues out there now?
Firstly, existing balances in default products don't have to be converted to MySuper products until 2017. This gives unscrupulous funds some time to extract more in fees. There even appears to be cases where a separate company has been set up with a more competitive MySuper fund. What this means is that existing balances can't be rolled into the more competitive fund automatically, giving another opportunity to get/keep people in less competitive funds.
Secondly, there is the potential for high fees to be charged by affiliated planners to put consumers into higher-fee funds. It is unclear how widespread this is or will be. But the bottom line is if you're paying more than 1% p.a. you'd better be very clear on what value you're getting for that money. There are places where a financial planner can add value. But by itself choosing an asset allocation should not be that expensive or needed so frequently that you're paying an annual fee. What my parents did was to see a planner associated with one of their industry funds, pay up-front (still much less than 1% as a once-off) for a financial plan when they were close to retirement, and pay a few hundred dollars for a follow-up every few years when needed.
Thirdly, perhaps a smaller issue, is fees versus value. I'm unconvinced of the value of active management of equities, and there's plenty of evidence to support that particularly for the large stocks that form the majority of equities in Super. But accessing assets like unlisted infrastructure and property are a more expensive proposition and may provide some diversification benefits. Reasonable people can disagree on whether it is worth paying a bit more for these. However it is clear that fees of 2% p.a. as still exist in some retail products will almost never be worth paying; they will struggle to overcome the drag of those fees and there are just better-value products in the market.
So if you want such assets in your Super, I won't judge you (I even had posts on some in the past). Just include them in a cost-effective manner. For example, Australian Super's Conservative Balanced fund (which doesn't seem all that conservative) charged 0.41% + 0.03% in performance fees last year and has a target ('strategic asset allocation') of 25% in Direct Property and Infrastructure. That's the best value I've found for such an allocation but most Industry Super funds will have a reasonable quantity of Property and Infrastructure while keeping fees in-line with the banks' pure index products (and as with Australian Super many can beat the banks on pure index products for those of us so inclined). And if you want something in-between, a mix of AustralianSuper's Conservative Balanced and Index DIversified funds can be used. For example 40% Conservative Balanced and 60% Index Diversified will get you a target allocation of 10% in unlisted assets. All for about 0.3% p.a.
Fees might not be everything but they can make a big difference to the final balance which funds your retirement income. Be aware of what you are paying and make sure you are getting value for money.
Sunday, 17 August 2014
The Best Deals in Superannuation - Product Updates
It's been a year since I first posted and there are a few fee changes to report.
Firstly, Australian Super have updated their fees for the 12 months to June 2014:
Firstly, Australian Super have updated their fees for the 12 months to June 2014:
| Investment fee | |
| Indexed Diversified | 0.21% |
| Australian Shares | 0.30% |
| Australian Fixed Interest | 0.18% |
| International Fixed Interest | 0.24% |
| Cash | 0.06% |
The most relevant change for our needs is for their Index Diversified (which now has their baseline asset allocation with 70% in growth assets) from 0.11% p.a. to 0.21% p.a. in fees. International Fixed Interest also changed from 0.13% to 0.24% and there were other smaller changes above.
This fee increase is disappointing. Australian Super is the largest fund in Australia and for Index products and standard asset classes should be able to leverage substantial economies of scale.
On the other end of the spectrum, Hostplus are funding their Operational Risk Financial Requirement via the 'Administration Reserve' rather than additional fees from 30 June 2014. They've also largely maintained their low investment fees with only small changes below. This gives them an industry leading low-cost and index offering for most asset classes (their cheapest separate international share fund charges 0.47% p.a. but they do include an international component in their Indexed Balanced fund which should suffice for most).
| Investment fee | ||
| Indexed Balanced | ||
| Cash | 0.02% | |
| Macquarie Investment Management – Australian Fixed Interest* | 0.00% | |
| BlackRock Asset Management – International Fixed Interest Diversified Fixed Interest | 0.25% | |
| Industry Super Property Trust – Property | ||
| Industry Funds Management – Australian Shares |
Note * the Macquarie Investment Management – Australian Fixed Interest option is actually Macquarie agreeing to "Guarantee the return of the UBS Composite Bond Index (All Maturities)", not a direct investment in Fixed Interest.
EDIT October 2014: Hostplus have now updated their most recent financial-year fees in their member guide. I've updated above. Sadly some of the fees are higher but the Indexed Balanced is even lower!
EDIT October 2014: Hostplus have now updated their most recent financial-year fees in their member guide. I've updated above. Sadly some of the fees are higher but the Indexed Balanced is even lower!
In the past 12 month there has been an explosion of providers offering 'SMSF-Lite' direct investment options into ETFs and Term Deposits. If you're using another provider it would be great to hear about it. From perusing the different providers, most I've found don't offer better value than was already offered (with the early providers Australian Super and ING Direct) so probably appeal more to members who want to stick with their existing fund than people looking to switch.
The best I've found of the new breed of these direct investment options is again HostPlus with their ChoicePlus offering. Their ETF List can be found on their website at the end of this article. They offer a better range of Australian Share ETFs than ING Direct but not as wide a range of International Share ETFs (the latter being comparable to Australian Super with just iShares providing International Share ETFs).
Finally, before making any changes remember to consider your insurance needs. For low balances the cost differences in Life and TPD insurance can be larger than the differences in investment fees, so make sure you'll be able to get the coverage you want (get it approved if needed before closing your old super) at a reasonable price.
Links:
Tuesday, 18 March 2014
ETFs for the New Year
A few new ETF choices are now available on the Australian Stock Exchange. They're not for me...yet...but are worth keeping an eye on.
Firstly we're finally able to get better access to emerging markets. iShares have had some relatively pricey ETFs available for a while. Now Vanguard and SSGA have joined the party:
Vanguard® FTSE Emerging Markets Shares ETF (VGE) has an Expense Ratio of 0.48%
SPDR® S&P ®Emerging Markets Fund has an Expense Ratio of 0.65%
The Vanguard ETF is cheaper but, like the iShares ETF, it's not clear to me if we'll be able to claim back (non-US) foreign tax withheld. The SPDR fund has a similar Expense Ratio to the iShares ETF but the fund, as far as I can tell, is Australian domiciled and does not hold an underlying US fund like the Vanguard and iShares ETFs. In principle foreign tax withheld may be claimed as a tax offset but this will depend on your individual tax situation.
The other two Australian funds are interesting from a diversification perspective. I've long been concerned that we're not diversified enough. When we invest in an ASX200 or ASX300 ETF or managed fund typically around 50% of the fund is in the top 10 ASX stocks (overweight banks and resources) and around 70% in the top 25. Most of our risk and return comes from a relatively small number of stocks. Similarly, an Australian Property ETF or index fund (at time of writing) will usually have around 1/3rd of its weighting just in the Westfield Group and Westfield Retail Trust. Market Vectors are attempting to mitigate these with the following funds:
The Market Vectors Australian Equal Weight ETF (Expense Ratio 0.35%) tracks a quarterly rebalanced index of the top 50-70 stocks. While it is still heavily weighted towards financials it may suffer less idiosyncratic (single stock) risk than a market-capitalisation weighted ETF. One concern I have are that it only rebalances quarterly, so can get quite far away from equal-weight in a short time (at time of writing, after only a couple of weeks of ETF operation, Newcrest Mining was sitting at 1.84% of assets while equal weight is closer to 1.3%). The bigger concern with that rebalancing is that it will lead to fund turnover so has the potential for short term capital gains which should be passed on to ETF holders. Until it builds a track record I'd be concerned about holding it unless perhaps in a Self Managed Superannuation Fund in the pension phase (where tax is not an issue).
The Market Vectors Australian Property ETF (Expense Ratio 0.35%) caps individual holdings to 10%. The two Westfield entities still add up to 20% but it does seem an improvement. Turnover may be an issue, although not to the same extent as the equal weight ETF. I'd still only be inclined to hold this in Superannuation but mainly because taxation of Australian Real Estate Investment Trusts is relatively messy.
Firstly we're finally able to get better access to emerging markets. iShares have had some relatively pricey ETFs available for a while. Now Vanguard and SSGA have joined the party:
Vanguard® FTSE Emerging Markets Shares ETF (VGE) has an Expense Ratio of 0.48%
SPDR® S&P ®Emerging Markets Fund has an Expense Ratio of 0.65%
The Vanguard ETF is cheaper but, like the iShares ETF, it's not clear to me if we'll be able to claim back (non-US) foreign tax withheld. The SPDR fund has a similar Expense Ratio to the iShares ETF but the fund, as far as I can tell, is Australian domiciled and does not hold an underlying US fund like the Vanguard and iShares ETFs. In principle foreign tax withheld may be claimed as a tax offset but this will depend on your individual tax situation.
The other two Australian funds are interesting from a diversification perspective. I've long been concerned that we're not diversified enough. When we invest in an ASX200 or ASX300 ETF or managed fund typically around 50% of the fund is in the top 10 ASX stocks (overweight banks and resources) and around 70% in the top 25. Most of our risk and return comes from a relatively small number of stocks. Similarly, an Australian Property ETF or index fund (at time of writing) will usually have around 1/3rd of its weighting just in the Westfield Group and Westfield Retail Trust. Market Vectors are attempting to mitigate these with the following funds:
The Market Vectors Australian Equal Weight ETF (Expense Ratio 0.35%) tracks a quarterly rebalanced index of the top 50-70 stocks. While it is still heavily weighted towards financials it may suffer less idiosyncratic (single stock) risk than a market-capitalisation weighted ETF. One concern I have are that it only rebalances quarterly, so can get quite far away from equal-weight in a short time (at time of writing, after only a couple of weeks of ETF operation, Newcrest Mining was sitting at 1.84% of assets while equal weight is closer to 1.3%). The bigger concern with that rebalancing is that it will lead to fund turnover so has the potential for short term capital gains which should be passed on to ETF holders. Until it builds a track record I'd be concerned about holding it unless perhaps in a Self Managed Superannuation Fund in the pension phase (where tax is not an issue).
The Market Vectors Australian Property ETF (Expense Ratio 0.35%) caps individual holdings to 10%. The two Westfield entities still add up to 20% but it does seem an improvement. Turnover may be an issue, although not to the same extent as the equal weight ETF. I'd still only be inclined to hold this in Superannuation but mainly because taxation of Australian Real Estate Investment Trusts is relatively messy.
Thursday, 12 September 2013
Some More Super Options
Two more Super Fund options I've come across recently.
Overall, for asset allocations around the 'Balanced' mark, they're probably not as good value as an Industry Fund. Their 'Growth' and 'High Growth' fund are pretty good value for someone who wants a more aggressive allocation but wants it all in a single diversified fund. If you're willing to set a similar allocation yourself, as I was, Sun Super is still lower-cost using State Street Global Advisors as underlying fund managers.
Another fund I've come across recently is potentially useful as a specialist option only. In general their costs are not as low as most index funds. However Hesta are the only fund I've come across which offers Unlisted Infrastructure at a reasonable fee. They have a $65 + 0.08% administration fee and the Infrastructure option has a an Investment Fee of 0.77% (so total 0.85%). The option holds 5-15% cash, presumably to ensure it stays sufficiently liquid.
I wouldn't use this as the core of my superannuation, as it's not as diversified or low-cost as shares, but I can imagine once I have a large enough balance that having a percentage in the Industry Funds' Infrastructure pool might be desirable. This is an asset I typically would have limited access to, even through a Self-Managed Fund. For example, if I had a total portfolio of $500,000 and wanted ~8% ($40,000) in Infrastructure then the fees ($65 + 0.85%) would be around 1%. Too high for the bulk of my funds but perhaps useful for additional diversification.
Hopefully it (or a similar new option) is still around in, say, 10 years once I have a sufficient portfolio to justify such an investment. One other thing to note is that they don't allow this separately in their Pension product so it may only be efficient prior to retirement.
Firstly, for those who want Vanguard funds but don't need to 'customise', there's Bendigo SmartStart Super.
Bendigo and Adelaide Bank's offerings have asset allocation managed by Sandhurst Trustees. But the underlying investments for their diversified index fund offerings (i.e. in Shares, Property, Fixed Interest, but not Cash) are managed by Vanguard.
The particular funds of interest are: Bendigo Defensive Index Fund, Bendigo Conservative Index Fund, Bendigo Balanced Index Fund, Bendigo Growth Index Fund, and the Bendigo High Growth Index Fund. They also have actively managed funds with higher fees.
There's a base fee of $98 per annum so, like most industry funds, they're not cost effective if you have a very small balance. The MER (Investment Fee) ranges from 0.39% - 0.46%. This is less than the ANZ equivalent, albeit with less flexibility to customise the allocation (the most you can do is mix-and-match to get an 'in-between' allocation). There are no Withdrawal or Switch fees but there is a buy-sell spread of 0.20-0.25% to recover transaction costs. The 'Neutral' asset allocation is listed along with the MER below:
The particular funds of interest are: Bendigo Defensive Index Fund, Bendigo Conservative Index Fund, Bendigo Balanced Index Fund, Bendigo Growth Index Fund, and the Bendigo High Growth Index Fund. They also have actively managed funds with higher fees.
There's a base fee of $98 per annum so, like most industry funds, they're not cost effective if you have a very small balance. The MER (Investment Fee) ranges from 0.39% - 0.46%. This is less than the ANZ equivalent, albeit with less flexibility to customise the allocation (the most you can do is mix-and-match to get an 'in-between' allocation). There are no Withdrawal or Switch fees but there is a buy-sell spread of 0.20-0.25% to recover transaction costs. The 'Neutral' asset allocation is listed along with the MER below:
| Defensive | Conservative | Balanced | Growth | High Growth | Cash | |
|---|---|---|---|---|---|---|
| MER (Investment Fee) | 0.39% | 0.41% | 0.43% | 0.45% | 0.46% | 0.40% |
| Australian shares | 9% | 20% | 33% | 42% | 50% | |
| International shares | 7% | 15% | 20% | 30% | 37% | |
| Property securities | 4% | 5% | 7% | 8% | 10% | |
| Australian fixed interest | 30% | 22% | 17% | 8% | ||
| International fixed interest | 25% | 18% | 13% | 7% | ||
| Cash | 25% | 20% | 10% | 5% | 3% | 100% |
Overall, for asset allocations around the 'Balanced' mark, they're probably not as good value as an Industry Fund. Their 'Growth' and 'High Growth' fund are pretty good value for someone who wants a more aggressive allocation but wants it all in a single diversified fund. If you're willing to set a similar allocation yourself, as I was, Sun Super is still lower-cost using State Street Global Advisors as underlying fund managers.
Another fund I've come across recently is potentially useful as a specialist option only. In general their costs are not as low as most index funds. However Hesta are the only fund I've come across which offers Unlisted Infrastructure at a reasonable fee. They have a $65 + 0.08% administration fee and the Infrastructure option has a an Investment Fee of 0.77% (so total 0.85%). The option holds 5-15% cash, presumably to ensure it stays sufficiently liquid.
I wouldn't use this as the core of my superannuation, as it's not as diversified or low-cost as shares, but I can imagine once I have a large enough balance that having a percentage in the Industry Funds' Infrastructure pool might be desirable. This is an asset I typically would have limited access to, even through a Self-Managed Fund. For example, if I had a total portfolio of $500,000 and wanted ~8% ($40,000) in Infrastructure then the fees ($65 + 0.85%) would be around 1%. Too high for the bulk of my funds but perhaps useful for additional diversification.
Hopefully it (or a similar new option) is still around in, say, 10 years once I have a sufficient portfolio to justify such an investment. One other thing to note is that they don't allow this separately in their Pension product so it may only be efficient prior to retirement.
Bendigo SmartStart Super Fees (see page 14)
Hesta
Hesta PDS (see page 8 for administration fees)
Hesta Investments/Investment Fees (see page 19 for Infrastructure)
Hesta
Hesta PDS (see page 8 for administration fees)
Hesta Investments/Investment Fees (see page 19 for Infrastructure)
Sunday, 18 August 2013
Index Managed Funds and ETFs outside Superannuation
I've been asked recently about Vanguard and other index managed funds outside super so decided to collect my thoughts. In principle this should also be applicable to self-managed superannuation funds, although the tax implications will be different. This post will be focused on products available in Australia more than general strategy (keep in mind that process is often more important than product: saving 0.1% in fees is no help if your strategy is one that you find too stressful and can't maintain).
There are two main investment vehicles that can easily be used for index investing in shares. The more traditional managed funds are purchased by applying to the fund manager. Minimum investments vary - Vanguard and Colonial First State have a $5,000 minimum. However both offer regular investment investment plans from $100 per month which can be particularly useful when starting investing. 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). Canadian couch potato 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).
An Exchange Traded Fund (ETF) is basically a managed fund which trades like a share on the ASX. Typically ETFs have lower ongoing management costs than an equivalent standard managed fund but you do need to pay brokerage to purchase them, just like a share. The ETFs that align with the investment approach I've been talking about are again Index Funds. Index ETFs typically trade very close to their Net Asset Value (NAV), the price of the underlying shares or bonds in the index.
Exchange Traded Funds (ETFs) have been around for a while, slowly gaining in popularity in Australia since the launch of the ASX200 SPDR fund (STW) in August 2001. iShares and Vanguard have increased the range of offerings substantially over the past few years.
For traditional 'unit trust' managed funds, Vanguard charge 0.9% p.a. for share-based and diversified index funds up to $50,000 (and 0.7-0.75% for cash and bond funds, although many would not choose to hold these or hedged international shares outside superannuation due to their relative tax inefficiency. Edit 7/10/2013: Now down to 0.75% p.a. for Australian Shares also). Some comparable (as well as a couple of extra) Colonial Wholesale investments are listed below (Note the Realindex and Multi-Index funds may not be as tax-efficient due to likely higher portfolio turnover and bond holdings respectively):
ETFs will typically have lower fees still (but require brokerage to purchase). Some 'core' ETFs that may be of interest for the sorts of portfolio strategies I've been discussing are tabulated below:
Overall Vanguard have the best-diversified ETFs that I can find with the lowest costs. I would have used VAS myself except it didn't exist when I started investing in index funds. Note that VAS covers closer to 300 stocks, rather than the ASX200.
Note that at least the Vanguard International funds below (and I think some of the iShares ones also) are cross-listed US funds. That's a big reason why they're so inexpensive but this means that there is some withholding tax from their distributions (that you can hopefully use as a tax offset at tax time) and there may be other tax implications for US residents. The SPDR products are more expensive but do offer the US and the rest of the world in a single product, as well as a hedged currency version.
I'm personally wary of Australian Small-Cap without some control for 'value' due to the weighting towards smaller mining and mining services companies, but this may not be entirely rational
As mentioned above, Bonds may be more suitable to hold in Superannuation depending on your specific taxation circumstances
Those cover the major asset classes. While there are many other ETF options available, some more specialised ones that I am reviewing for my own use are below. If the paragraph explaining below makes no sense, I'd skip these funds and stick to the major asset classes.
These ETFs cover segments and 'tilt' that is often more challenging to find in low cost index funds and Superannuation in Australia. Unfortunately we don't yet have access to the breadth of products available in the US. If you have been reading about Asset Allocation you might have come across the "Three Factor Model". You might also notice that there's very little in the way of International Small-Capitalisation exposure. While there aren't general International Small-Cap index ETFs available in Australia yet we can at least get access to US Small-Cap indices (both the S&P and the Russell 2000). Similarly there aren't many options to get access to 'value' tilted index funds. I'm not sure either the BetaShares or Russell fund are perfect from this perspective but they are at least low cost. Note that the Russell fund only holds a subset of the ASX, so may experience more turnover (and hence distribute more capital gains when it comes to tax time) than a pure capitalisation-based index fund tracking the ASX200 or the entire Australian stock market.
As always, I appreciate any comments. And if you've found other low-priced index funds available in Australia, let us know.
Discosure: the author has holdings in VTS, VEU, STW and RVL.
Links:
Vanguard ETFs
Vanguard Retail Managed Funds (<$500,000)
State Street Global Advisors ETFs
iShares ETFs
Colonial First State 'Wholesale Investments'
Tips for trading ETFs
Choosing between ETFs and traditional index funds
Vanguard paper on home bias
19/09/2013 Additional Note: Regarding the cross-listed US funds I recently emailed Vanguard about VEU "Vanguard® All-World ex-US Shares Index ETF". The fund is US-listed but receives dividends from other countries. Some of those countries apply their own withholding taxes. I'm told US taxpayers are able to take these into account as tax credits but Australian resident taxpayers are only able to take into account the US withholding tax (so this shouldn't be a problem for VTS and other funds with US companies). While the headline Management Expense Ratio is lower than most Australian domiciled funds with International Shares, some of that benefit may be lost by taxation.
A back of the envelope calculation I did for my own benefit: if we expect around 2% p.a. in dividends then at a withholding tax rate of 15% we'd lose 0.3% while with 30% withholding it would be 0.6%. If this is half our International Shares exposure (with the other half in the US) then we're talking 0.15%-0.3% difference which is less or about the same as the fee difference (50% VTS/50% VEU would have an average MER of 0.10% while WXOZ has an MER of 0.42% for a 0.32% fee difference). Depending on the dividend distribution it may even be that WXOZ has a slight edge at times when it comes to the combination of fees and taxes, albeit without quite the level of diversification offered by the two Vanguard funds. I suggest professional advice be sought on the taxation implications if you have any concerns about tax treatment.
There are two main investment vehicles that can easily be used for index investing in shares. The more traditional managed funds are purchased by applying to the fund manager. Minimum investments vary - Vanguard and Colonial First State have a $5,000 minimum. However both offer regular investment investment plans from $100 per month which can be particularly useful when starting investing. 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). Canadian couch potato 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).
An Exchange Traded Fund (ETF) is basically a managed fund which trades like a share on the ASX. Typically ETFs have lower ongoing management costs than an equivalent standard managed fund but you do need to pay brokerage to purchase them, just like a share. The ETFs that align with the investment approach I've been talking about are again Index Funds. Index ETFs typically trade very close to their Net Asset Value (NAV), the price of the underlying shares or bonds in the index.
Exchange Traded Funds (ETFs) have been around for a while, slowly gaining in popularity in Australia since the launch of the ASX200 SPDR fund (STW) in August 2001. iShares and Vanguard have increased the range of offerings substantially over the past few years.
For traditional 'unit trust' managed funds, Vanguard charge 0.9% p.a. for share-based and diversified index funds up to $50,000 (and 0.7-0.75% for cash and bond funds, although many would not choose to hold these or hedged international shares outside superannuation due to their relative tax inefficiency. Edit 7/10/2013: Now down to 0.75% p.a. for Australian Shares also). Some comparable (as well as a couple of extra) Colonial Wholesale investments are listed below (Note the Realindex and Multi-Index funds may not be as tax-efficient due to likely higher portfolio turnover and bond holdings respectively):
| Fund | MER |
|---|---|
| Colonial First State Wholesale Index Australian Share | 0.41% |
| Colonial First State Wholesale Index Australian Bond | 0.41% |
| Colonial First State Wholesale Index Property Securities | 0.41% |
| Colonial First State Wholesale Index Global Share | 0.53% |
| Colonial First State Wholesale Index Global Share – Hedged | 0.53% |
| Realindex Wholesale Australian Small Companies | 0.86% |
| Realindex Wholesale Emerging Markets | 0.94% |
| FirstChoice Wholesale Multi-Index Conservative | 0.61% |
| FirstChoice Wholesale Multi-Index Diversified | 0.65% |
| FirstChoice Wholesale Multi-Index Balanced | 0.70% |
ETFs will typically have lower fees still (but require brokerage to purchase). Some 'core' ETFs that may be of interest for the sorts of portfolio strategies I've been discussing are tabulated below:
| Australian Large-Cap Shares | MER | |
|---|---|---|
| Vanguard® Australian Shares Index ETF | VAS | 0.15% |
| SPDR® S&P®/ASX 200 Fund | STW | 0.29% |
| iShares MSCI Australia 200 | IOZ | 0.19% |
Overall Vanguard have the best-diversified ETFs that I can find with the lowest costs. I would have used VAS myself except it didn't exist when I started investing in index funds. Note that VAS covers closer to 300 stocks, rather than the ASX200.
Note that at least the Vanguard International funds below (and I think some of the iShares ones also) are cross-listed US funds. That's a big reason why they're so inexpensive but this means that there is some withholding tax from their distributions (that you can hopefully use as a tax offset at tax time) and there may be other tax implications for US residents. The SPDR products are more expensive but do offer the US and the rest of the world in a single product, as well as a hedged currency version.
| Global Large-Cap Shares | MER | |
|---|---|---|
| SPDR® S&P® World ex Australia Fund | WXOZ | 0.42% |
| SPDR® S&P® World ex Australia (Hedged) Fund | WXHG | 0.48% |
| or approximately split into US/non-US | ||
| Vanguard® US Total Market Shares Index ETF | VTS | 0.05% |
| Vanguard® All-World ex-US Shares Index ETF | VEU | 0.15% |
| iShares Core S&P 500 ETF | IVV | 0.07% |
| iShares MSCI EAFE ETF | IVE | 0.34% |
I'm personally wary of Australian Small-Cap without some control for 'value' due to the weighting towards smaller mining and mining services companies, but this may not be entirely rational
| Australian Small-Cap Shares | MER | |
|---|---|---|
| Vanguard® MSCI Australian Small Companies Index ETF | VSO | 0.30% |
| SPDR® S&P®/ASX Small Ordinaries Fund | SSO | 0.50% |
| iShares S&P/ASX Small Ordinaries | ISO | 0.55% |
| Australian Listed Property | MER | |
|---|---|---|
| Vanguard® Australian Property Securities Index ETF | VAP | 0.25% |
| SPDR® S&P®/ASX 200 Listed Property Fund | SLF | 0.40% |
As mentioned above, Bonds may be more suitable to hold in Superannuation depending on your specific taxation circumstances
| Australian Bonds | MER | |
|---|---|---|
| Vanguard® Australian Fixed Interest Index ETF | VAF | 0.20% |
| Vanguard® Australian Government Bond Index ETF | VGB | 0.20% |
| iShares UBS Composite Bond | IAF | 0.24% |
| iShares UBS Government Inflation | ILB | 0.26% |
| iShares UBS Treasury | IGB | 0.26% |
| SPDR® S&P®/ASX Australian Bond Fund | BOND | 0.24% |
| SPDR® S&P®/ASX Australian Government Bond Fund | GOVT | 0.22% |
| Russell Australian Government Bond ETF | RGB | 0.24% |
| Russell Australian Semi-Government Bond ETF | RSM | 0.26% |
| Russell Australian Select Corporate Bond ETF | RCB | 0.28% |
Those cover the major asset classes. While there are many other ETF options available, some more specialised ones that I am reviewing for my own use are below. If the paragraph explaining below makes no sense, I'd skip these funds and stick to the major asset classes.
| iShares: Small-Cap US and Emerging Markets | MER | |
|---|---|---|
| iShares Core S&P Small-Cap ETF | IJR | 0.17% |
| iShares Russell 2000 ETF | IRU | 0.24% |
| iShares MSCI Emerging Markets ETF | IEM | 0.69% |
| Value-Tilted and Fundamental Index Funds | ||
|---|---|---|
| BetaShares FTSE RAFI Australia 200 ETF | QOZ | 0.30% |
| Russell Australia Value ETF | RVL | 0.34% |
These ETFs cover segments and 'tilt' that is often more challenging to find in low cost index funds and Superannuation in Australia. Unfortunately we don't yet have access to the breadth of products available in the US. If you have been reading about Asset Allocation you might have come across the "Three Factor Model". You might also notice that there's very little in the way of International Small-Capitalisation exposure. While there aren't general International Small-Cap index ETFs available in Australia yet we can at least get access to US Small-Cap indices (both the S&P and the Russell 2000). Similarly there aren't many options to get access to 'value' tilted index funds. I'm not sure either the BetaShares or Russell fund are perfect from this perspective but they are at least low cost. Note that the Russell fund only holds a subset of the ASX, so may experience more turnover (and hence distribute more capital gains when it comes to tax time) than a pure capitalisation-based index fund tracking the ASX200 or the entire Australian stock market.
As always, I appreciate any comments. And if you've found other low-priced index funds available in Australia, let us know.
Discosure: the author has holdings in VTS, VEU, STW and RVL.
Links:
Vanguard ETFs
Vanguard Retail Managed Funds (<$500,000)
State Street Global Advisors ETFs
iShares ETFs
Colonial First State 'Wholesale Investments'
Tips for trading ETFs
Choosing between ETFs and traditional index funds
Vanguard paper on home bias
19/09/2013 Additional Note: Regarding the cross-listed US funds I recently emailed Vanguard about VEU "Vanguard® All-World ex-US Shares Index ETF". The fund is US-listed but receives dividends from other countries. Some of those countries apply their own withholding taxes. I'm told US taxpayers are able to take these into account as tax credits but Australian resident taxpayers are only able to take into account the US withholding tax (so this shouldn't be a problem for VTS and other funds with US companies). While the headline Management Expense Ratio is lower than most Australian domiciled funds with International Shares, some of that benefit may be lost by taxation.
A back of the envelope calculation I did for my own benefit: if we expect around 2% p.a. in dividends then at a withholding tax rate of 15% we'd lose 0.3% while with 30% withholding it would be 0.6%. If this is half our International Shares exposure (with the other half in the US) then we're talking 0.15%-0.3% difference which is less or about the same as the fee difference (50% VTS/50% VEU would have an average MER of 0.10% while WXOZ has an MER of 0.42% for a 0.32% fee difference). Depending on the dividend distribution it may even be that WXOZ has a slight edge at times when it comes to the combination of fees and taxes, albeit without quite the level of diversification offered by the two Vanguard funds. I suggest professional advice be sought on the taxation implications if you have any concerns about tax treatment.
Asset Allocation Part 2
I have a confession to make. I suffer from 'home bias'. What is 'home bias'? Read on:
In my last post I discussed asset allocation between 'growth' assets such as shares and 'defensive' assets such as cash. This post is a tricky one, perhaps with no 'right' answer. Let's say we've decided on an allocation to growth assets, be it 20% or 80%. How will we then split that amongst different growth assets? Let's start with Shares from different countries and regions.
Back in the early days of finance theory some would have suggested we hold the global market proportionally. This would mean holding approximately 2-4% in Australian shares. Yet we see most balanced funds have somewhere between 50-75% of the growth assets in Australian shares and property.
There are a few reasons I think this is the case, some of them good reasons for this 'home bias'. I won't go into finance theory but will focus more on the practical reasons:
In my last post I discussed asset allocation between 'growth' assets such as shares and 'defensive' assets such as cash. This post is a tricky one, perhaps with no 'right' answer. Let's say we've decided on an allocation to growth assets, be it 20% or 80%. How will we then split that amongst different growth assets? Let's start with Shares from different countries and regions.
Back in the early days of finance theory some would have suggested we hold the global market proportionally. This would mean holding approximately 2-4% in Australian shares. Yet we see most balanced funds have somewhere between 50-75% of the growth assets in Australian shares and property.
There are a few reasons I think this is the case, some of them good reasons for this 'home bias'. I won't go into finance theory but will focus more on the practical reasons:
- Australian residents (and our super funds) are usually eligible for franking credits from dividends. In our superannuation funds this will often reduce the overall tax paid on earnings of the fund and so increase after-tax returns
- Currency fluctuations can also impact international share returns in Australian dollars. However in an international fund hedged to the Australian dollar, imperfect currency hedging can be a drag on returns (and lead to increased tracking error: make it more difficult for a manager to track their index)
- Australians may just be more comfortable with local shares, making a 'home bias' more marketable
Having some international exposure is likely to be beneficial over the long term. The key reason is diversification - when they're not perfectly correlated (don't always move together in the same direction) diversification of volatile assets with similar expected returns can actually lead to higher returns with lower risk. For more on the conceptual details of this I strongly recommend reading one of the books below by William J. Bernstein.
Unfortunately we can't know ahead of time which combination of assets will perform best over the next year, 5 years, 10 years, or 30 years. So some criteria I see as important are:
- Having a sufficiently diversified portfolio to smooth possible outcomes
- Having a portfolio containing a balance of assets which still allow you to sleep at night!
The latter criteria may not seem entirely rational. My key point with it is that making constant changes to your asset allocation (for example purposely lowering your allocation to US shares when they're doing badly relative to Australian shares, say) is paradoxically a good way to lose money (as we're selling low and buying high). And if you're not comfortable with, say, more than 50% international shares it greatly reduces the chances of 'staying the course' during the inevitable ups and downs.
Personally, I'm now comfortable with somewhere around the range 35-50% of my share allocation in international shares and 50-65% in Australian shares. This may or may not be optimal but is a plan I can handle and will hopefully give me sufficient diversification over the years. What are your thoughts on asset allocation - have you been able to overcome 'home bias'?
Links:
Vanguard paper on home bias
I'd greatly appreciate any comments with good guides to asset allocation in Australia. I haven't found an Australian book that comes close to the William Bernstein books below:
Vanguard paper on home bias
I'd greatly appreciate any comments with good guides to asset allocation in Australia. I haven't found an Australian book that comes close to the William Bernstein books below:
The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between
I'm currently reading The MoneySense Guide to the Perfect Portfolio. It's a very short book, costs $4.99USD on Kindle/iPad and provides a nice first introduction to Asset Allocation with index funds. While the Bernstein books above are written from a US perspective, this one is Canada-focused. So the specific products are different (e.g. we have Super, not RRSPs) but many of the challenges are similar: Asset Allocation in a country with a relatively small, undiversified local stock market (skewed towards Financial and Commodity stocks)
If you'd like to see how different combinations of assets have performed over the last 40 years, Vanguard have a calculator. While past performance need not be reflected in future performance it's some comfort to know that over reasonable time periods there hasn't been so much difference between 55%/45% Australian/International shares and 65%/35% Australian/International shares.
Rick Ferri also points out that getting close to the right asset allocation is usually best, rather than worrying down to that last 3%
Rick Ferri also points out that getting close to the right asset allocation is usually best, rather than worrying down to that last 3%
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