Managed Funds Vanguard

Thanks @austing

From the same article above

As you have often said let great plan not be the enemy of good plan. VAS ETF is still an excellent product for anyone who wants to invest in ASX index ETF. I would be more than happy to bet VAS ETF will be still going good 50 years from now tracking the ASX300 as best as any other ETF out there.

Cheers,
Oracle.

 

Don't get me wrong I still think VAS is a great product. That report is a number of years old and VAS hadn't been around that long to be fully put to the test. Since then it does appear that the capital distribution issue from redemption in the underlying wholesale funds may have been a problem. So I just posted the report to make people aware that most Vanguard ETFs are not a pure stand alone ETF product.

The reason why Thornhill and many others detest unlisted funds is because of the unnecessary return of capital. I'm just highlighting that with Vanguard ETFs as opposed to stand alone ETFs the redemption issue may still be a problem.

 

Was here also

VAS ETF latest dividend

 

Yes.

Another reason I like LICs:

"Basically, it's just an example of the vagaries of a managed fund. Dealing with inflows and outflows creates issues with managing distributions. It is for this reason many investors prefer to invest directly or via LICs which have a closed pool of capital."

 

This is all good stuff and I think we important to look under the hood at these products.

Yes I agree that VAS will likely be very long lived.

The share class structure that Vanguard is using is something I wasn't aware of, and I think should limit a lot of the down sides of redemptions in a net outflow situation for remaining holders. I'd be more concerned with their Lifestrategy products which after looking quickly at the 2016 reports had pretty significant outflows. Even still the capital returned was not egregious, but in an ideal world you wouldn't get any.

Now I think about it, the LIC structure also has an inherent issue that the share class structure of Vanguards addresses ; the imbedded long term capital gains retained in the LIC, and when realised, are borne by each shareholder regardless of duration of holding, and whether the holder benefited or not.

 

More controlled rather than forced upon from redemptions. And unlike Vanguards related redemption CGT the older LICs are likely to come with CGT discount?

Huge difference between unitised structure of unlisted fund and LIC.

Having owned both over decades I know which one I'd choose. And despite criticism of Thornhill by some he's had a lifetime of experience with unlisted funds and left the industry because he could no longer promote unlisted funds for his employer (Perpetual) knowing of their inherent short comings.

Can't possibly see how you can compare the two.

 

Really, so you the shareholder decide when the portfolio manager of the LIC sells down longstanding positions? Ok. The net result is similar right? Nta now reduced due to tax effect on realised gain.

 

Yep we know the inherent issues. Must distribute all gains, existing tax positions etc.

Do you get the difference that applies with Vanguards structure vs every other unlisted unit trust though? Pretty substantial difference.

 

But it's through selling of asset by Mgr (and very infrequent) not because of nervous nelly investors redeeming units because last quarter results were poor.

 

It may well need to become more frequent though right? The future may not look like the past, and LIC managers may hold on to very old positions too long in order to avoid the tax hit. I can see for example major disruption in the banking industry being a big problem for the large LICs...sell or hold? Sell or hold?? But the tax...and its effect on NTA and SP....ahhhhhhhhh

I think any pooled investment vehicle has its tax compromises, the best possible is direct shares or SMA where tax position is only your own.....but then they come with all of their own issues!!!

 

That is a very interesting point you raise.

I think it is inevitable that in the next 10-15years our index is going to become more and more diversified. Health care and IT sectors should grow nicely and resources and financials will become smaller and smaller. This will make it harder to beat the index I believe.

The reason why it's so hard to beat the S&P500 index is because it is so diversified. Apple the largest constituent with market cap of $800B has a weighting of only 2.85%

On the other hand CBA the largest constituent with market cap of $140B (less than 1/5 of Apple) has a weighting of 9.3%. Not to mention the next 3 in the list are also banks. With Westpac at 7.4%, ANZ at 5.87% and Nab 5.6%. So top 4 account for nearly 28% of the index.

The top 4 holdings of S&P 500 only contribute 7.75%

Cheers,
Oracle.

 

Yes in regard to index funds the constituents will represent the changes happening in the underlying economy, the good, the bad and the bubbles. LICs unwlling to realise long term capital gains (reluctant sellers) not wanting to lose their ATO LIC discount status may not represent what is happening in the economy at a point in time.

If you go back in time the holdings of the old LICs may surprise you. They might be slow to act but they do. A good thing in my inexperience.

There is no perfect investment. But in 60 to 80 years the three major LICs have seen enormous change but continued to prosper.

It's sometimes exhausting going over the same old ground. If one likes Index product stick to it. Maybe I'm getting older and set in my ways but LICs are what I know and they have rewarded me very well. I was one of the earlier investors in the first well known index ETF STW around 2002. And by far still the largest and most popular ETF in OZ. I eventually sold it years later investing proceeds into LICs.

I can only speak from experience rather than analysis paralysis over the potential future pros and cons of LICs vs ETFs.

We could debate these issues forever wasting time and energy. Just choose your path then stick with it. Index ETFs are a great product but for better or worse I sleep well at night investing in LICs locally.

 

I am pretty confident that old LIC will make the necessary changes as the index constituents also change.

Agree. I think the closest thing to perfect investment you will ever get to is buy low cost diversified index fund or LIC that is an index proxy and keep buying regularly in times of optimism and pessimism and you will end up better than most professional money managers.

I agree completely. You need to invest in whatever you feel you understand and can get you the investment returns you will be happy to accept over your investment time horizon. SANF is more important than earning additional 0.2% or 0.4% IMHO.

Cheers,
Oracle.

 

I appreciate you bearing with us @austing however fwiw this recent discussion has turned over new stones and subtly pushed understanding along. Until yesterday I was unaware of Vanguards share class structure in its managed funds for example, and I'd be surprised if many knew either.. Cheers.

 

Yes of course. The class structure has been discussed here a couple of times previously but certainly not as repeatably as many other topics. Plus the discussion is much deeper this time. So apologies for stifling further discussion. Keep going please.

FWIW I'm a fan of VGS and hold with no intention of selling. Fortunately it's held mostly in a tax free Super environment. So although return of capital for the wrong reasons (infrequently fortunately) is undesirable at least I'm shielded from CGT issues.

It would seem there's no so thing as a perfect structure. Despite any shortcomings what's most important to me is survivorship. I want to set and forget knowing that the Mgr is likely to be around in the very long term. The old LICs and Vanguards "single asset class" funds would seem to meet that criteria. Plus as seen with their "diversified funds" the negative is that the investor has no control over them periodically changing asset allocation. So probably best to invest in separate asset class funds and allocate / rebalance yourself to minimise CGT etc.

 

This might be relevant to the discussion:
Australian index ETF showdown: IOZ, STW & VAS compared

I'm hoping Snidely Whiplash will get to the bottom of this with more detailed research on distributions:

 

Thanks for the informed and wide discussion here about some of the deeper considerations of ETF/LIL investing

 

Yep that's what I was looking for, lower yield, higher franking (indicates pass through dividends rather than return of capital). Will review

 

Thanks @austing.

If the LICs do move with the times does this imply that the capital gains in the LICs will eventually need to be paid when moving into future profitable companies? Does this then mean we should take more consideration of the post-tax NTA especially given the never sell mantra?

 

Given that any changes will be slow and gradual (less than around 5% pa) I'd still be inclined to use pre-tax NTA. Post-tax NTA assumes complete liquidation of the entire portfolio. Read my next post about possible negatives of older LICs and advantages of different types of ETFs.

Might take a short while to type up.