Monthly Archives: September 2014

Should Australians be paying +400% more for ETFs than their U.S. counterparts? 25 September 2014

There has been a lot of press over the past couple of years about how much extra Australian consumers have to pay to access digital content, given the marginal cost of delivery between various regions – The Australian newspaper recently referred to this price discrimination as ‘The Australia Tax’ (Demolishing ‘The Australia Tax’ Should be a government priority 9 August 2014).

The article cites examples of Australians having to fork out 50% more for the hit show ‘Game of Thrones’, and 82% more for Sia’s new hit single when purchased via the Australian IT Tunes store versus buying it from the US store – and she is an Aussie!

The IT Pricing Inquiry conducted by a House of Reps committee, which began in May 2013 received 133 submissions and 15 supplementary submissions “from angry consumers who detailed allegedly exorbitant prices they were paying.” (Australians pay 50 per cent more for tech goods, say IT pricing inquiry).

It is little wonder that the media, government agencies and consumer groups have focused on this issue – it is simply not fair.

And to the ETF market we go…

But do Australian investors pay more in management fees than investors in other developed markets for their expsoures, where the cost of delivery can change due to different regulatory regimes, the size of the market opportunity set and different listing requirements etc, and if so, how large should these differences in prices be? And is there any evidence that Australians are over paying for like-for-like ETFs?

The answer is not straightforward…

Stage one of my desktop review looked at a small sample of like-for-like ETFs offered by the same companies here in Australia and in the US.  This quick review highlighted that Australian investors do not seem to be getting a raw deal in terms of management fee differentials – this shows that the costs of operating in Australia and in the US are similar because the size of some of these ETFs are relatively small, ruling out lack of sale as a reason to have higher management fees.  The second stage looked at ETFs that offer similar asset class exposures and performance characteristics to see whether there are more cost effective ways of getting these similar exposures. In this case, Australians are paying as much as +400% (not a typo) than they could or perhaps, should be. Surprisingly, where there are cheaper asset class exposures in the US ETF market, those providers already operate here in Australia, but have chosen, for whatever reason, to not offer those ETFs here.

High level observations…

  1. Blackrock’s iShares have zero difference between prices offered to both Australian and US consumers in their global ETFs (they are expensive no matter where you reside!).
  2. Vanguard have some price differences between markets but in the main are the same (see below for a major exception).
  3. State Street (SPDRs) have similar prices between their Australian and US listed ETFs too.

Vanguard, please explain…

It’s worth pointing out the one major price discrepancy within Vanguard, because the Australian listed FTSE Emerging Market ETF (VGE) is a direct feeder into the US listed Vanguard FTSE Emerging Market ETF (VWO). However, the Australian ETF costs 0.48% p.a. versus 0.15% p.a. for the US listed ETF – a whopping +200% difference, which Vanguard do not replicate with their other ETFs. Please explain?!  Remember, the operating costs are similar and scale has been ruled out as a reason for management fee differences.

This price differential does not make sense because Vanguard is a not for profit organisation.

So no smoking gun here thankfully, however…

What is odd, however, is that because of the choices ETF providers have made here in Australia in terms of the ETFs they choose to offer, may be leading to consumers paying well in excess of what they should have to for similar asset class exposures. It seems that the big providers may have carved the market up between themselves to maintain prices (not an accusation), or, have not been able to identify enough scale to justify bringing more of their products to market at substantially lower prices. Below I provide some examples.

Europe exposed ETFs are +400% more expensive in Australia than they could be

The iShares European Equity ETF (IEU) costs 0.60% p.a. here in Australia. In the US, Vanguard offer similar exposures through their FTSE Europe ETF (VGK), which costs 0.12% p.a. That is, the Australian ETF is +400% more expensive than a similar ETF listed in the US – not exactly the same in terms of holdings but they are similar – see Table 1 below.

Table 1 – The difference between the two portfolios is marginal but Australians pay a lot more

Top 10 iShares European ETF (IEU) Vanguard FTSE Europe ETF (VGK)
1 Novatris Royal Dutch Shell
2 Nestle Nestle
3 Roche HSBC
4 HSBC Roche
5 Total SA Novartis
6 Royal Dutch Shell BP
7 BP Total SA
8 Sanofi Sanofi
9 Banco Santander Banco Santander
10 Bayer AG GlaxoSmithKile

Table 2 – This lack of material portfolio difference shows up in the performance similarities of the two US listed ETFs to June 30, 2014

iShares Europe ETF (IEV) Vangaurd FTSE Europe ETF (VGK)
1 Year 29.39% 29.36%
3 Years 8.54% 9.02%
5 Years 12.65% 13.25%

Healthcare exposed ETFs are 400% more expensive in Australia than they could be

iShares offers their Global Healthcare ETF (IXJ) here in Australia for 0.48% p.a. but in the US, as with the Vanguard Europe ETF example above, Vanguard offers a Health Care ETF (VHT) for 0.14% p.a.. In this case, the Australian ETF is 240% more expensive than an offshore equivalent!

Table 3 – as with the Europe ETF, there are many similar names across the two healthcare portfolios

Top 10 iShares Global Healthcare (IXJ) Vanguard Health Care ETF (VHT)
1 Johnson & Johnson Johnson & Johnson
2 Novatris Pfizer
3 Roche Holdings Merck & Co
4 Pfizer Gilead
5 Merck Amgen
6 Gilead Briston-Myer
7 Sanofi AbbVie
8 Bayer United Health
9 Glaxo Biogen
10 Amgen In Celgene

Table 4 – the Vanguard ETF has produced better returns in excess of the price differential to June 30, 2014

iShares Global Healthcare ETF (IXJ Vangaurd Health Care ETF (VHT
1 Year 28.31% 30.76%
3 Years 19.90% 22.09%
5 Years 19.38% 21.22%

The performance tables above are in US dollar terms.

Where to from here?

It is obvious, that in time, ETFs will play a major role in investor portfolios given the growing preference for low cost and highly liquid asset class tools and instruments for their beta exposures. Australia is still a small ETF market at circa $10bn of AUM and 94 products on offer but is growing faster than system.

Some ideas to consider…

Firstly, Vanguard, please reduce the price of your Emerging Market ETF to match that of your US listed vehicle – it is a feeder fund and you like to boast that your ETFs are “90% lower than the average expense ratio of funds with similar holdings” (except if you live in Australia!).

Secondly, IFAs need to start demanding that the ETF providers bring their low cost ETFs into the market for similar exposures to create some healthy competition, and along with it, substantially lower prices for Australian consumers.

Lastly, both ETFs and their more active cousins, Listed Investment Companies (LICs), need to have all of their fees disclosed in investor portfolios. The crazy anomaly exists in the market today where multi-managers and model portfolio providers do not have to disclose such fees in the underlying manager costs because they are seen as listed companies (and not listed managed funds, which they effectively are), which artificially lowers the cost of the overall portfolios when they are used to gain asset class exposures – this is optics because the fees are eating into gross returns. I know of some dealer groups that do actually disclose these ETF/LIC management costs to clients – bravo to them. Making these fees disclosable, will put pressure on ETF providers to offer their best and lowest cost products to Australian consumers – there is little incentive for them to do that presently whilst there is a fee disclosure free lunch.

Andrew Fairweather, Founding Partner and Managing Director

The Multi Manager Vertical Integration Champion is? 8 September 2014

There have been a number of articles written recently on the perils of vertical integration from a consumer’s point of view, especially in light of poor advice scandals within some of Australia’s largest advice/product providers. Many of these issues have arisen because of poor monitoring of compliance, ill designed incentives (depending on your point of view!), questionable cultures (e.g. sales versus customer care), and the poor recruitment and training of advisers who have been let loose on customers to provide that ‘advice’.

Vertical integration is well understood in the wealth management market and is akin to a pharmaceutical company owning the drug manufacturing capability (asset management), the drug distribution outlets/pharmacists (administration platforms) and general practitioners (advisers). To confuse (or at least not to enlighten) consumers – because most of us would have major issues with a structure like this in the drug industry – the drug companies would operate under multiple brands that might bare no relationship with the parent company, also allowing their GPs to operate under a brand of their choice. What’s wrong with that? Plenty.

But from a multi manager point of view (one aspect of the financial services value chain), which of the big four bank plus AMP ensures that they have more in-house asset management capabilities used in their ‘multi manager’ portfolios, aside from the use of their internal platforms, versus seeking the best managers in each asset class to manage a component of their portfolios?

In a nutshell, AMP is the market leader in their Future Directions portfolios with 40%+ invested in internal funds, with ANZ having none (due to a lack of asset management capability).

Table 1 – AMP is the market leader in using in-house funds in their multi manager portfolios


table 1

Source: CFS, Advance, MLC, AMP, ANZ

How much is acceptable?

It probably depends on whom you ask! From a shareholder perspective, the more the better but from a consumer point of view (who probably has no idea about this stuff) a level below 20% might be acceptable, especially for passive exposures. From ANZ’s point of view they really have no choice but to invest externally, but the fund managers at BTIM and Ascalon could feel hard done by Advance (but this might be Advance’s value proposition to say their is no influence) and might use this table to ask for more flows! (Disclosure: Winston distributes Morphic, an Ascalon manager, to IFAs).

But wait there’s more!

To ensure that the analysis included the whiter than white industry funds, I thought I would include AustralianSuper, Australia’s largest Industry Fund to see how much of their Balanced fund is invested in-house versus partnering with external managers.  And not to be outdone, they have about 42% of their funds managed by IFM and their in-house teams across various asset classes.

Final comment

At the end of the day what matters are risk adjusted returns.  If vertically integrated groups can justify using in-house products and internal teams to manage a large slice of the portfolio pie, it has to stand up to external scrutiny. Consumers are reasonably savvy to work out if their funds are not performing, the PMs of these portfolios do care about their careers (e.g. performance matters) and advisers have to put the interests of their clients first when recommending their parent company multi manager portfolios in any event – those three factors provide a tight set of external pressures to keep focusing on performance – when the use of in-house assets start to impact returns, I am sure the multi manager PMs would respond quickly because of those pressures.

Andrew Fairweather, Founding Partner and Managing Director