Vanguard Investments Australia has warned investors to be wary about the tax implications of high portfolio turnover in regard to the net returns they are expecting to receive from financial products.
In particular, Vanguard is urging investors to examine how the returns from a fund are made up in terms of the ratio of income to capital growth.
According to Vanguard Investments Australia head of retail Robin Bowerman, the important items to identify are the amount of dividends, long-term capital gains, and short-term realised capital gains that go into producing the overall return of an investment, along with their tax implications.
To date, this type of information has not been readily available to investors. However, the situation has seen some improvement with the recent move by research house Morningstar to provide investors and advisers with after-tax return data.
This has allowed more meaningful comparisons of funds to be made.
“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 per cent to 20.21 per cent, depending on the portfolio’s tax efficiency. A fund manager with high portfolio turnover could cost investors 3.1 per cent or $20,413 in a year,” Bowerman explained.
While the Morningstar information is a step in the right direction Bowerman believes the Australian market has a long way to go in this area.
“This is where we’re lagging the US market. In the US, investors and advisers get the data that we report every month, and ever since 2001 that information has been readily available for investors,” he said.
From the feedback Vanguard has received regarding its reporting of post-tax returns, Bowerman feels advisers are beginning to appreciate the value of this information and subsequently develop an appetite for it.
He was quick to clarify that in alerting investors to be aware of this issue Vanguard was not pushing the claims of one type of fund over another.
“The key to this is not whether one fund is better than the other, it’s more about knowing what you buy,” Bowerman said.
“From an adviser’s point of view the real value of this is when they recommend a fund they do it knowing what the tax efficiency is or is expected to be,” he added.
