26 Sept 2006

 Vanguard_27092006_Don't_be_deluded.pdf (PDF - 45KB)

Take a closer look under the bonnet: Don't be deluded by headline performance numbers

Melbourne, 26 September 2006: While Australian share funds have enjoyed a strong year on the back of higher commodity prices and a growing economy, Vanguard is urging investors to take a closer look at the underlying components of a fund's return, net of expenses and fees.

Vanguard Investments Australia Head of Retail, Mr Robin Bowerman says while Australian share funds have performed strongly, a fund manager with high portfolio turnover could cost investors 3.1% or $20,413 in one year*.

Currently, only few Australian funds management groups report fund performance on an 'after-tax' basis. However, the industry is seeing signs of early adoption, with Morningstar providing data on after-tax returns for investors and advisers.

According to Morningstar# data, the average return of the 15 largest Australian share funds for the 12 months to 30 June 2006 was 25.35 per cent, with more than two-thirds of that return, 17.43 per cent, delivered as income*.

"If you look at the Morningstar data, an investor on the highest marginal tax rate of 48.5 per cent who invested $500,000 in the average Australian share fund could receive an after-tax return of between 17.07% - 20.21%, depending on the portfolio's tax efficiency. A fund manager with high portfolio turnover could cost investors 3.1% or $20,413 in a year," said Mr Bowerman.

"Although it's important to keep in mind that past performance is not a reliable indicator of future performance. By comparison, the same investor who invested $500,000 in the Vanguard Index Australian Shares Fund over the same period where the Fund's income component was only 6.96 per cent, and portfolio turnover was low, could receive an after-tax return of 21.15 per cent.

"The fundamental issue for investors and advisers is to understand the different components of a fund's performance and how much turnover there is in a portfolio that determine its tax effectiveness. The aim is to give investors and advisers the information to allow them to make informed decisions.

"A fund manager's turnover is an important factor in determining tax implications, with high turnover funds generating high taxable gains that are passed on to investors as taxable income."

Vanguard began reporting after-tax returns in 2004 to help investors understand the real value of their investment, after expenses and tax.

Since 2001, the United States' Securities and Exchange Commission regulations have made it compulsory for fund managers to disclose their returns on an after-tax basis.


*Calculations based on the difference between the average 15 largest Australian share funds and Vanguard's Australian Share Fund over 12 months to June 30, 2006, with low portfolio turnover (Morningstar subscription data & Vanguard).
** Franking credits excluded
***Past performance is not a reliable indicator of future performance.
# Source: Morningstar Data, as at 30 June 2006

Visit: www.vanguard.com.au to see all the after-tax returns of Vanguard's funds.


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Notes to Editors:

Vanguard Investments Australia Ltd is a wholly owned subsidiary of The Vanguard Group which is based in the US and currently manages approximately US$1.0 trillion (A$1.3 trillion) for more than 18 million individual and investor accounts as at 31 August 2006. In Australia, Vanguard has established a reputation as an index specialist, managing A$38 billion in index funds, for both institutional and retail investors.
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