A better way to manage international shares
Same underlying investments but reduced cost and easier execution
The old and the new – a measured change
Many of our clients have international shares as one of their investment sectors. For many years this investment was achieved by use of a managed fund operated by Vanguard, the large US investment manager, with their Index International Shares Fund.
In 2015, Vanguard introduced an easier and cheaper way to achieve the same investment. This is done by using what is known as an ‘Exchange Traded Fund’ (ETF). Simply, an ETF is a managed fund that is traded on a stock exchange.
The Vanguard ETF in which we have commenced investing is called the Vanguard MSCI International Shares ETF. It is listed on the ASX with the code VGS. The letters ‘MSCI’ refer to the benchmark the ETF uses: the MSCI International Index (the most widely used index of world share-markets).
Same underlying investments
The investments that underlie both the managed fund and the ETF are the same. They draw from the same pool of international investments. The Vanguard ETF we are now using was only created in the past year (as a separate share class of the pool in which we were already invested via the managed fund), which is why we haven’t moved sooner.
The benefits of using the ETF are several fold:
1. Much lower cost. The ETF has one fee (0.18% p.a.) for all participants. This compares with the old fund structure where fees ranged from 0.35% to 0.9%. This is a considerable cost saving for every client (proportionally more for smaller balances).
2. Easier rebalancing. This is achieved using a standard share-market settlement (what is called ‘T+3’, i.e. the settlement date is the transaction date plus three days) approach. The old fund structure required a longer transaction time, along with individual cheques and application forms.
3. Speedier rebalancing. The new ETF will enable us to more precisely manage client international holdings to their agreed target (the Managed Fund required minimum amounts for redemptions and investment). This will enable us to pick up some incremental returns for clients.
The cost of this change for clients is negligible.
We have to realise existing holdings (cost-free) and repurchase the exposure through the ETF incurring a once only brokerage of about 0.3%. We can keep ‘time out of the market’ to a minimum because of the cash balances that we hold for most clients.
As with all aspects of our investing, we manage on an individual and after-tax basis. And hence we have and shall transition client’s exposure on an individual and after-tax basis. Clients with self managed superannuation funds (SMSFs) in pension phase or clients who otherwise do not pay tax have already been transitioned. Clients with capital gains tax greater than the benefit from the transition we shall not transition, unless there is a compelling reason so to do. And we shall certainly discuss with each client before so doing.
As mentioned above, we have already commenced this transition and will progressively move other clients over as their individual tax positions allow. All new clients requiring international share exposure and existing clients requiring additional international share exposure will now invest directly in the ETF.
I would caution, however, that our use of the Vanguard ETF is not an endorsement of ETFs in general. I have concerns that a significant proportion of the ETF market is owned by hedge funds/ institutions or other investors with short-term horizons that may lead to distortions in poor markets. Likewise, a number of the ETF’s are ‘synthetic’ in that they own contracts and/ or derivatives and not ‘real’ assets. This could also cause significant stress in times of peril.
This Vanguard ETF is not in either of these camps, so we are comfortable to invest in it on behalf of our clients.
This is a beneficial move for clients. And if any client wishes to further discuss or understand the transition, please contact your Strategist (Chris, Jack, Jenny, Nikki or Simon), or Anthony, directly.