Funds: Pam Walkley New low-fee offerings

Investors stand to benefit as a newcomer slashes the cost of active management

Vanguard’s entry into low-cost active managed funds in Australia will put added pressure on the fees charged by fund managers, most of which have failed to produce returns that meet, let alone beat, their benchmarks.

The new funds – Vanguard Global Value Equity Fund, Vanguard Global Minimum Volatility Fund and Vanguard Global Quantitative Equity Fund – are initially being offered as wholesale funds with a minimum investment of $500,000.

But Vanguard expects to launch exchange traded funds (ETFs) based on these funds later this year, says Robin Bowerman, the company’s head of market strategy and communications. And this means retail investors will be able to invest in these options with as little as $500.

S&P Dow Jones Indices, which tracks the performance of over 1100 actively managed equity and bond funds in Australia, has found that many managers have consistently underperformed their benchmarks.

In its latest research on the sector, it found that eight out of 10 active managers of funds trying to beat the S&P/ASX 200 Index in the year ending December 30, 2016, underperformed, achieving an average return of 9.2% against an 11.8% gain by the index.

And this trend is not new: the same research shows most active fund managers have been underperforming over three, five and 10 years.

Undoubtedly fees have impacted the performance of active managed funds. Vanguard’s three new funds, all of which give investors exposure to global equities, will charge a management fee of 0.45% a year. This compares with the average cost of 1.23% for Australian active equity funds, according to Vanguard, which bases the figure on its analysis of Morningstar data at December 2016.

Providing low-cost, high-quality funds that let investors keep more of their returns is central to Vanguard’s long-term approach, says Bowerman. Research consistently shows that keeping costs low can improve the odds of success across both index and active funds. The basis of this culture is Vanguard’s mutual structure in the US, which means it’s owned by its investors not shareholders.

And while this is the fund manager’s first foray into active funds in Australia, it started life as an active manager, says Bowerman, and it now manages more than $1.5 trillion in active assets globally.

Based on its overseas funds, low fees have not resulted in poor performance. Over the past five years, 96% of Vanguard’s funds have outperformed their industry peer group and 93% have outperformed over the past 10 years to December 2016, according to statistics from Lipper, a Thomson Reuters company.

One of the reasons the manager can offer these funds at a relatively low cost is that they are quantitatively driven, meaning investment selection is rules based, says Bowerman. This reduces the number of analysts needed.

And as Vanguard has grown – it now has global funds under management of $5.4 trillion – it has benefited from economies of scale, which it has passed through to investors in the form of lower management costs, says Bowerman. He points to Vanguard’s record of reducing fees in Australia; it has delivered 17 individual fund management expense ratio (MER) reductions to clients in its 20 years of operation.

The three funds recently introduced to Australian investors are already up and running overseas and have track records: •

Vanguard Global Minimum Volatility invests in global equities, including Australia, and aims to provide lower volatility relative to the global equity market. Since inception in July 2015 it has returned 7.45% a year compared with its benchmark of 6.11%pa (FTSE Global All Cap Index – AUD hedged). •

Vanguard Global Value Equity seeks to provide long-term capital appreciation through an active approach that invests in global equities demonstrating value characteristics. It was launched in September 2016 and the three-month return was 12.09% to December 2016, compared with the benchmark (FTSE Developed All-Cap in AUD Index), which returned 6.92% over the same period. •

Vanguard Global Quantitative Equity uses a proprietary quantitative process to evaluate international equities to identify those offering a balance between attractive valuations and attractive growth prospects relative to their peers to build a portfolio of between 200 and 400 securities from the 1500 in the index. Since inception in January 2016 it has returned 10.76%pa compared with 9.95%pa for the benchmark (MSCI World ex-Australia Index with net dividends reinvested in AUD.)