17 Aug 2006

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Australian share funds delivered strong performance in the last financial year but investors receiving their tax statements from funds this month may be shocked at the amount of tax they will have to pay.

Vanguard Investments Australia Head of Retail, Robin Bowerman says Vanguard has led the way on reporting the after-tax impact on investor returns, but a majority of the funds management industry has been slow to follow suit.

A breakdown of performance numbers for Australia's largest 15 Australian share funds for the last financial year using Morningstar Research highlights the variation in the amount of income versus capital growth that major funds delivered.

"The average return for the 15 largest retail share funds for the 12 months to 30 June 2006 was 20.05 per cent*.

"When you look at the top 15 share funds by size you see that most of the return - 13.9 per cent was delivered as income and only 6.09 per cent as capital growth. For a top marginal taxpayer it means they will pay 48.5 per cent on the full income component of the total return," Bowerman says.

"By way of comparison Vanguard's Australian share index fund had a total return of 23.3 per cent of which 8.5 per cent was income and 14.7 per cent was growth. Of course, keep in mind that no fund's past performance is a reliable indicator of its future performance," Mr Bowerman said.

"It is the breakdown of the components of the return that is critical to determining how tax effective or otherwise a fund is. How much is growth versus income and then how much of the income is long-term or short-term realised capital gains.

"There is an increasing focus on fees - which is good - but investors, their advisers and the funds management industry must focus on the after-tax result. It is what people get to put in their back pocket that is the critical number," Mr Bowerman said.

"This is an issue of transparency for investors and advisers - a high turnover fund will typically generate higher levels of income and if that is what you are looking for as an investor that is great. But for investors on high marginal tax rates looking for long-term capital growth it is almost impossible to select the appropriate fund because that information is not readily available," Bowerman says.

Vanguard's range of index funds have low portfolio turnover which means they hold securities for the long-term and take greater advantage of capital gains discounts. That provides a tax advantage compared to a strategy of actively buying and selling.

In Australia reiterating this timely message for investors is Burton Malkiel, Professor of Economics at Princeton University and author of best-selling personal investment title "A Random Walk Down Wall Street.**

Writing on the subject of after-tax returns in his seminal book, Dr Malkiel wrote: "Taxes are a crucially important financial consideration...I agree with Jack Bogle, founder of The Vanguard Group, who says that anything that encourages trading will hurt investors: Investors cut their own throats when they trade" Dr Malkiel said.

According to Vanguard, the historical evidence provides a strong argument for advisers and investors to demand that after-tax return information be made available to them when making fund selection decisions and to have greater visibility of the impact of trading within managed portfolios.

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

* Source: Morningstar data
** A Random Walk Down Wall Street, 2003, pp365-6, Burton G Malkiel, Copyright WW Norton & Co. Inc.

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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$989 billion (A$1.2 trillion) for more than 18 million individual and investor accounts as at 31 July 2006. In Australia, Vanguard has established a reputation as an index specialist, managing A$37.2 billion in index funds, for both institutional and retail investors.


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Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFSL 227263 / RSE License L0001335) is the issuer of interests in Vanguard funds. The above information does not take into account your circumstances so you should consider your circumstances and the Product Disclosure Statement before making any investment decision. All PDS documents are available by contacting Vanguard or via our website at www.vanguard.com.au. Past performance is not an indication of future performance. Performance is not guaranteed and investments may rise or fall in value.