For institutional use only. Not for distribution to retail investors. Libertas Wealth Management Ideas Forum: SMSFs and ETFs Paul Chin: Senior Investment

For institutional use only. Not for distribution to retail investors.

LibertasWealth Management Ideas Forum: SMSFs and ETFs

Paul Chin: Senior Investment Analyst

Julie Scurfield: Business Development Manager NSW

2For institutional use only. Not for distribution to retail investors.

Vanguard Global Funds Under Management: as at 31 Dec 2013

A business to partner with

Global strength & resources

The Vanguard Group founded in 1975

Over A$3 trillion global funds under

management

Index pioneer

> 13,500 crew

Australian footprint

Headquarters in Melbourne

Offices in Sydney, Brisbane & Perth

48 investment crew

45 traditional managed funds and ETFs

*As at 31 December 2013

67%33%


• Alignment of interests

• Low cost investment solutions

Vanguard’s ownership structure makes us different

The Vanguard Group Inc. cost advantageAverage expense ratios†

Expense ratios as at 31 December 2012. Vanguard expense ratios range from 0.02 to 1.71%.

† Represented as a percentage of net assets.†† Sources: 1975–1977 Weisenberger Panorama; and Lipper Inc. thereafter.‡ Source: Lipper, Inc.

Note: Information displayed is in reference to US-domiciled Vanguard funds.

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

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1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50% All funds 1.11%††

Vanguard 0.19%

1.08%

0.89%


The average expense ratio for Vanguard ETFs is 17 basis points, while the Australian industry average is 31 basis points*

Vanguard’s low-cost advantage

Vanguard ETFs Industry

0.17%

0.31%

Average ETF management cost in Australia

Source: ASX with Vanguard calculations, weighted by funds under management as at 31 December 2013.


SMSFs: changing the world one fund at a time

• There are now 509,000+ SMSFs in existence* with $506 billion in assets and 963,000 individual trustees

• Average of 26,000 new funds a year since June 2008

• Key drivers:– Control– Cost– Tax/franking credits

Which is challenging the industry on a number of fronts…

• Industry funds− Heavy outflows in pension mode− High account balance clients deserting funds− Launching member-directed investment options to retain

members/assets

• Adviser platforms− Adds high cost layer− Accountants entering adviser licensing regime

* ATO SMSF statistical bulletin June 2013

Number of SMSFs(Source: APRA Quarterly Superannuation Performance Report)

301k307k

313k320k

339k347k

353k

374k380k

402k407k

413k421k

428k435k

443k453k

460k469k

477k488k

498k503k

386k392k396k

366k359k

300,000

350,000

400,000

450,000

500,000

550,000


Typical Allocation of SMSF* versus Vanguard diversified funds

* Investment Trends, “April 2013 Self Managed Super Fund: Investor Report”, vol. 2, p. 251, June 2013.

Asset Class(proxy for simulation)


The obvious risks … and the known unknowns

Trustee overconfidence• Cash allocations protected many

SMSFs through the GFC (skill vs. luck?)

Pursuit of high yield• Tax value of franking credits• High yield hybrid offers

Asset allocation • Concentration risk ( no. of shares)• Lack of diversification

− International (equities and FI)− Domestic fixed income− Residential property

The SMSF challenge: Uncovering the risk vs return profile within 509,000 portfolios…


Vanguard ISG Methodology for SMSF Simulations… a random walk

• Constructed portfolios of randomly selected securities that matched allocation of typical self-managed super funds (SMSFs),determined from survey of 1,305 SMSF investors

• Generated 1000 simulated SMSFs using historical returns

• Investigated return paths & risk profiles of these simulated SMSF returns

• Investigated three different compositions for equity portion of simulated SMSFs:

1. All equities selected from S&P/ASX 3002. Most equities selected from large-cap stocks3. Most equities selected from high-yielding stocks

• Used conservative approach to simulations, true risks even higher


Broad-based equity portfolio: Return paths for 1000 simulated portfolios of typical SMSFs

Source: Vanguard, Bloomberg, and FactSet Oct 2013

45% equity allocation inequally weighted securities:- 18 equities from S&P/ASX 300

• Large spread of potential return paths

• Return path volatility of simulated SMSFs higher than for diversified growth fund

• Significant potential for very poor performance


Simulated risk for typical SMSF:Broad-based equity portfolio


Risk of typical SMSFin turbulent timesalmost double risk ofdiversified growth fund


High-yielding equity portfolio:Returns paths for 1000 simulated portfolio of typical SMSFs:


45% equity allocation inequally weighted securities: -15 equities high-yielding& 3 equities from S&P/ASX 300

• High-yield membership calculated by ranking 6-month yield calc 1-year prior &selecting top quartile equities

• Lower spread of returns thanbroad-based index simulation


Simulated risk for typical SMSF:High-yielding equities


Risk of typical SMSFin turbulent timesalmost double risk ofdiversified growth fund


Efficient Frontier Relative to Typical SMSF:equities selected from broad-based index


We looked at Vanguard diversified funds vs. typical SMSF relative to efficient frontier

• Vanguard diversified funds located close to theoretically optimal portfolios defined by efficient frontier

• Typical SMSF far from efficient frontier (i.e., additional risk not compensated by extra returns)

• Large risk-return spread in cloud of SMSF returns arises from selection risk


What do the risk and returns simulations tell us?

• Typical SMSF performed well during GFC – so why the high risk profile?

• Key drivers of risk are:

• Selection risk - leads to large spread of return paths

• Equity concentration risk – no. of securities; home country bias, low levels of international exposure

• Typical SMSF inefficient from risk-adjusted return perspective(cash drag reduces return & equity concentration, home country biasincreases risk)

• Are trustees conscious of risk within typical portfolio profiles?

• Conversation starter for brokers/advisers with clients on risk (vs reward) and value of strategic asset allocation and diversification

• What is the solution?

For institutional use only. Not for distribution to retail investors. 15

Vanguard ETFs on the ASX


Vanguard’s current range of ETFs

FIXED INCOME PROPERTY AUSTRALIAN SHARES INTERNATIONAL SHARES

ETF name

Vanguard Fixed Interest Index ETF

Vanguard Australian Government Bond Index ETF

Vanguard Australian Property Securities Index ETF

Vanguard Australian Shares Index ETF

Vanguard Australian Shares High Yield ETF

VanguardMSCI Australian Large Companies Index ETF

Vanguard MSCI Australian Small Companies Index ETF

Vanguard US Total Market Shares Index ETF

Vanguard All-World ex-US Shares Index ETF

Vanguard FTSE Emerging Markets Shares ETF

ASX code

VAF VGB VAP VAS VHY VLC VSO VTS VEU VGE

MER p.a. 0.20% 0.20% 0.25% 0.15% 0.25% 0.20% 0.30% 0.05% 0.15% 0.48%

Index UBS Composite Bond Index™

UBS Government Bond Index

S&P/ASX 300 A-REIT Index

S&P/ASX 300 Index

FTSEASFA Australia High Dividend Yield Index

MSCIAustralian Shares Large Cap Index

MSCIAustralian Shares Small Cap Index

CRSP US Total Market Index(AUD)

FTSEAll-World ex-US Index(AUD)

FTSE Emerging Index (AUD)

VAF VGB VAP VAS VHY VLC VSO VTS VEU VGE

Data as at 21 March 2014


Building an international equity portfolio in two ASX trades

Two trades:

• Build out a major asset class

• Over 5,800 securities

• Over 40 developed and emerging market economies

• Exxon, Apple, Microsoft, Johnson & Johnson, Nestle, HSBC, General Electric

• Weighted Management costs of 10 bps

Source: MSCI Inc. and Vanguard Australia

VTS50%

VEU50%


7 8 9 10 11 12 1318.0

18.5

19.0

19.5

20.0

20.5

21.0

21.5

22.0

Lowering portfolio risk, increasing diversification

• 2yr standard deviation falls 27%

• Expanded value proposition

• Build out fixed income, property, small ords, high yield…

2yr standard deviation %

tota

l ret

urn

%

Lower risk

Australian large caps

Portfolio after

Source: Morningstar Direct and Vanguard Australia. As at March 31 2014.

VTS20%

Australianlarge caps

60%VEU20%


7 8 9 10 11 12 13 149.0

9.5

10.0

10.5

11.0

Lowering portfolio risk, increasing diversification

• 3yr standard deviation falls 36%

• Expanded value proposition

• Build out property, small ords, high yield…


60%

3yr Standard Deviation

Tota

l Ret

urn

Lower risk

Australian Large Caps

Portfolio after

Source: Morningstar Direct and Vanguard Australia

MSCI ACWI20%


60%

UBS Comp20%


Vanguard ETF talking points


Australian shares – small companies

ETF name

Vanguard MSCI Australian Small Companies Index ETF (ASX Code: VSO.AXW)

IndexMSCI Australian Shares Small Cap Index

Management costs 0.30% p.a.

Average spread 0.18%

ASX listing date 26 May 2011

AUM $40.9m

No. Securities in ETF 166

Top 5 holdingsChallenger, Bluescope Steel, Ansell, Commonwealth Property Office, Duet Group

Distribution. (DRP?) Semi-annually (DRP)

Large cap % 0.00

Mid cap % 64.06

Small cap % 35.94

1 year return 1.09%

1 year index return 1.23%

All data as at 31 March 2014.

Note: The asset allocations in this diagram are examples only and do not represent a recommendation

Australian fixed interest

Cash

International shares

Listed property

Emergingmarkets

International fixed interest

AustralianShares

VHY

VSO

AustralianShares

AustralianShares


ETF name

Vanguard US Total MarketShares Index ETF (ASX code: VTS.AXW)

Index CRSP US Total Market Index



ASX listing date 12 May 2009

AUM (ETF/fund) A$44.7b (A$349.3b)

No. Securities in ETF 3,698

Top 5 holdingsApple Inc., Exxon Mobil Corp, Google Inc., Microsoft Corp., General Electric Co.

Distribution. (DRP?) Quarterly (No DRP)

Large cap % 72.09

Medium cap % 19.28

Small cap % 8.63

1 year return 38.00%


3 year return 18.91% p.a.

International shares - US shares



Cash


Listed property

Emergingmarkets



VTS

AustralianShares

VSO


VTS advantage: achieve broad diversification at lower cost

Summary performance statistics from May 2003 to December 2013. (May 2003 is when the CRSP index’s inception)

IndexCRSP US Total Market

S&P 500

Annualised return 9.32% 8.54%

Annualised risk 14.9% 14.3%

Market coverage 99.5% 81%

• Large cap• Mid cap• Small cap• Micro cap

• Large cap

VTSCRSP US Total Markets Index

(broad)

IVVS&P500

VTS IVV

MER % p.a 0.05 0.07

US broad, large, mid and small cap calendar year performance from 2000 to 2013

Summary performance statistics from May 2003 to December 2013. (May 2003 is when the CRSP index’s inception)


Australian property securities

ETF name

Vanguard Australian PropertySecurities Index ETF (ASX code: VAP.AXW)

Index S&P/ASX 300 A-REIT Index



ASX listing date 15 October 2010

AUM (ETF/fund) $166.9m ($2,892.9m)


Top 5 holdingsWestfield, Westfield,Retail Trust, Stockland, Goodman Group, Mirvac

Distribution. (DRP?) Quarterly (DRP)

Large cap % 61.04

Mid cap % 34.50

Small cap % 4.46

1 year return 4.86%


All data as at 31 March 2014.Note: The asset allocations in this diagram are examples only and do not represent a recommendation


Cash


Listed property

Emergingmarkets


AustralianSharesAustralianShares

VSO

VAP



ETF name

Vanguard Australian Fixed Interest Index Fund (ASX code: VAF.AXW)

Index UBS Composite Bond Index



ASX listing date 31 October 2012

AUM (ETF/fund) $31.3m ($3,686.3m)


No. Issuers in ETF 154

Distribution. (DRP?) Quarterly (DRP)

Yield to maturity 3.61%

Effective duration (yrs) 4.16

1 year return 3.18%




Cash


Listed property

Emergingmarkets



VAF

AustralianShares

VSO

4,314 stocks and bonds in 4 trades


Next steps…


Next steps…

• Vanguard has the largest financial adviser support team in Australia

• We can help you:

– have the ‘why Vanguard’ conversation with clients

– discuss the benefits of ETFs in investment portfolios

– articulate talking points on individual Vanguard ETF exposures


Appendix


• Do your homework

– What is the iNAV?

– What are typical spreads?

– What are spreads for the managed fund?

• Don’t trade during market open and market close

• Use “limit” orders

• On-screen volume is an indication of price, not the additional liquidity available

Trading tips

For ETF trade execution assistance, contact our ETF Help Desk:

1300 655 888


A starting point: The iNAV

Product iNAV Code

VAS.AXW VASINAV.ETF

VHY.AXW VHYINAV.ETF

VLC.AXW VLCINAV.ETF

VSO.AXW VSOINAV.ETF

VAP.AXW VAPINAV.ETF

VGB.AXW VGBINAV.ETF


Disclosures – General advice warning

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (“Vanguard”) is the product issuer.

This presentation contains general information and is intended to assist you. We have not taken anybody's circumstances into account so the information may not be applicable to your circumstances or those of any other person. This presentation was prepared in good faith and we accept no liability for any errors or omissions.

You should consider your circumstances or those of any other relevant person, and the relevant Product Disclosure Statement (PDS), before making an investment decision or recommendation. You can access our PDS at www.vanguard.com.au or by calling 1300 655 102.

Past performance is not an indication of future performance. Unless otherwise indicated, Vanguard pays a fee for access to the data used in this presentation but did not commission the research.

"Vanguard", "Vanguard Investments", and the ship logo are the trademarks of The Vanguard Group, Inc.© 2014 Vanguard Investments Australia Ltd. All rights reserved.

http://www.vanguard.com.au/


Important information

This presentation contains general information and is intended to assist you. In preparing the above information, individual circumstances, for example tax implications, have not been taken into account and it may, therefore, not be applicable to an individual’s situation. Before making an investment decision, you should consider your circumstances and whether the above information is applicable to your situation.

Past performance is not an indication of future performance. Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (“Vanguard”) is the issuer of the Vanguard® Australian 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 with Vanguard. Retail investors can transact in Vanguard ETFs through a stockbroker or financial adviser on the secondary market.

Investors should consider the relevant Prospectus and/or Product Disclosure Statement (“PDS”) in deciding whether to acquire Vanguard ETFs. Retail investors can only use the Prospectus and PDS for informational purposes. You can access the PDS and/or Prospectus at vanguard.com.au

Vanguard is not offering the Vanguard FTSE Emerging Markets Shares ETF in the United States and this presentation does not constitute an offer or an invitation to apply for or acquire any interests in the International ETFs in the United States. The information contained in this presentation is not intended for US persons as defined in Regulation S under the US Securities Act.

Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC ("S&P") and ASX® is a registered trademark of the Australian Securities Exchange Limited (“ASX”). These trademarks have been licensed for use by The Vanguard Group, Inc. Vanguard's ETFs are not sponsored, endorsed, sold or promoted by S&P or ASX, and S&P and ASX make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in the Vanguard ETFs.

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. For any such funds or securities, the Prospectus contains a more detailed description of the limited relationship MSCI has with Vanguard and any related funds.

“FTSE®” is a trademark of the London Stock Exchange Group companies (LSEG) and is used by FTSE International Limited under license. "All-World" is a trade mark of FTSE International Limited. The FTSE All-World ex US Index and the FTSE Emerging Index are calculated by FTSE. FTSE does not sponsor, endorse or promote this product and is not in any way connected to it; and does not accept any liability in relation to its issue, operation and trading. All rights in the FTSE ASFA Australia High Dividend Yield Index (the “Index”) vest in FTSE International Limited (“FTSE”) and The Association of Superannuation Funds of Australia (“ASFA”). “ASFA™”is a trade mark of ASFA. The Vanguard Australian Shares High Yield ETF, the Vanguard All-World ex-US Shares Index ETF and the Vanguard FTSE Emerging Markets Shares ETF (the “Products") have been developed solely by Vanguard. The Indices are calculated by FTSE or its agent. Neither FTSE nor its licensors are connected to and do not sponsor, advise, recommend, endorse or promote the ETF 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 ETF. Neither FTSE nor ASFA make any claim, prediction, warranty or representation either as to the results to be obtained from the ETF or the suitability of the Index for the purpose to which it is being put by Vanguard.

The marks and names "UBS Government Bond Index"and "UBS Composite Bond Index™" a are proprietary to UBS AG ("UBS"). Any use of these indices or the index names must be with the express written consent of UBS AG acting through its Australia Branch. UBS has agreed to the use of, and reference to the "UBS Government Bond Index" and "UBS Composite Bond Index™" ("Indices") by us in connection with the Vanguard funds and ETFs and the website material but no Vanguard fund or ETF is in any way sponsored, endorsed or promoted by UBS. UBS assumes no responsibility for this website material or the ETFs. Vanguard assumes sole responsibility for producing this website material, which has not been reviewed by UBS AG.

© 2014 Vanguard Investments Australia. All rights reserved.

Documents

For institutional use only. Not for distribution to retail investors. Libertas Wealth Management Ideas Forum: SMSFs and ETFs Paul Chin: Senior Investment