Vanguard dresses funds with real figures

Vanguard is to publish after-tax returns for all its products in what it claims will be a first within the Australian funds management industry.

The after-tax figures will cover a wide range of return periods on its products, with the figures being posted on the Melbourne-based asset manager’s website today.

Vanguard managing director Jeremy Duffield says after-tax returns are really what investors want to know, as tax can make a big difference and “is a critical argument in making investment decisions”.

“In Australia, the normal focus is on cost [of investing], but the greatest cost is tax,” Duffield said.

Based on five-year returns for its Australian Shares Index Fund, the before-tax return is 8.77 per cent. For a superannuation fund, the after-tax return on distributions is 9.35 per cent and for a mix-tax bracket retail investor, the return is 8.56 per cent. For retail investors in the higher tax bracket, the after-tax return on this fund is 7.74 per cent.

“The after-tax figures show superannuation funds get more and retail investors get less,” Duffield said.

“We find investors really care for what they keep in their pockets and this shows them the real return.”

The Australian arm of Vanguard is following its US parent, which introduced after-tax reporting in 1999.

“Now the SEC [Securities and Exchange Commission] has said it is mandatory. In the US the pre- and after-tax returns are compared and people talk about efficiency ratios,” Duffield said.

Fund managers generate varying amounts of tax, especially capital gains tax, which is reflected in the figures.

Duffield said active managers, which can have 100 per cent turnover of the fund during the year, will generate more tax than a fund with a ‘buy-and-hold’ strategy.

“Fund managers are typically judged by pre-tax performance numbers in regular surveys,” he said.

“But gross performance numbers can be misleading and an active manager which turns over the portfolio aggressively will deliver a lot less to the retail investor once tax is paid.”

Vanguard expects other managers to follow its lead, but Duffield believed pressure for change will come via the rating houses once they adopt the concept of after-tax reporting.

“We hope the investors will pressure the fund managers to give after-tax figures,” he said.

“But in the meantime, the managers should make the figures available to the rating agencies.”