For release 17 November 2005

Gold Coast, 17 November 2005: Investors and financial advisers are being short-changed by the lack of reporting of after-tax returns, according to Vanguard Investments Australia's Head of Retail, Robin Bowerman.

Speaking at the annual Financial Planning Association (FPA) national conference held today at the Gold Coast Convention Centre, Mr Bowerman urged advisers and investors to demand better levels of after-tax reporting from their fund managers.

"Investors in many Australian share funds had good reason to smile at the end of the last financial year - and so did the tax man," Mr Bowerman said.

"The median return for Australian share funds for the 12 months to 30 June was 25.2 per cent* for retail funds and 26.3 per cent for wholesale funds. But the hidden sting behind those numbers is the tax impact.

"According to Morningstar analysis both retail and wholesale funds delivered about half of their total return (12.1 per cent) as distributions or income. The attached table (see page 3) demonstrates - based on 2005 financial year data - a dramatic split between the income and growth components of Australian share funds during the period to 30 June 2005.

"It is reasonable to assume that a hefty portion of that income has been generated by realised capital gains because the income component of the S&P/ASX Accumulation Index (dividends only) to 30 June was 5.2 per cent which means investors may be very happy with the total return but unhappy with the tax bill."

The difference between June 2005 and June 2004 returns is dramatic - in the 2004 tax year retail Australian equity funds had median returns of 19.5 per cent and the income component was 4.2 per cent - in line with the market's yield of 4.9 per cent.

Morningstar Head of Consulting Anthony Serhan says part of the explanation for the big jump in income this year is that fund managers used up all the tax losses they were carrying forward from 2002 and 2003 in the strong markets of 2004.

Mr Serhan presented Morningstar research to the FPA conference on the performance of the 10 biggest wholesale Australian share funds. It showed that seven of the funds delivered double digit income returns. More startling is that six of the top 10 share funds produced more income than growth for the financial year ended 30 June 2005.

Morningstar continues to gather the data necessary to generate after-tax returns across a wide range of managed funds.

The evidence provides a strong argument for advisers and investors to have after-tax return information available to them when making fund selection decisions.

This is a fundamental reason behind Vanguard's push for the publishing of after-tax returns by fund managers and why it has led the way by publishing after-tax returns at a fund level on a monthly basis on its website for the past 12 months.

Vanguard's wholesale Australian Shares Index Fund had a total return of 25.9 per cent for the 12 months to June 30 with the income and growth splits (after fees) of 4.5 per cent income and 21.4 per cent growth.

The after-tax results point to another inherent advantage of the index approach - one that is possibly not well enough understood. The tax efficiency is a simple outcome of the 'low turnover, buy and hold' approach of Vanguard's optimised index investment process.

"There is an increasing focus on fees - which is good - but investors should also focus on the after-tax result. It is what people get to put in their back pocket that is the most important number of all" Mr Bowerman said.

*Source: Morningstar

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Notes to Editors:

Vanguard Investments Australia Ltd is a wholly owned subsidiary of The Vanguard Group, Inc., which is based in the U.S. and currently manages approximately US$893 billion (A$1.2 trillion) for more than 18 million individual and investor accounts as at 30 September 2005. In Australia, Vanguard has established a reputation as an index specialist, managing A$34.3 billion in index funds, for both institutional and retail investors.

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Turning growth into income: inside Australian share fund returns in 2005


Source: Morningstar

Total and Income figures calculated as the median.
Growth figures calculated as the difference between total return and income.

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