Fund Spotlight: why we like Vanguard LifeStrategy

Since launching in June 2011, the Vanguard LifeStrategy fund range has grown to be the market leader among passively managed multi-asset funds.

The funds launched with a focus on minimising costs, keeping the asset split between shares and bonds constant and not trying to time the market. This suite of funds has something for investors across the risk spectrum, ranging from 100% in equities to 20% in equities, with the remainder being invested in bonds from around the world.

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Three of these funds appear on interactive investor’s Super 60 investment ideas list: 20%, 60% and 80% equity. The trio also form part of our Quick-start Fundsrange that offer a simple starting point for investors, costing 0.22% a year each.

The LifeStrategy fund range is managed by three global committees which all contribute to the final product. These teams meet throughout the year to review the funds’ allocation to different markets and discuss emerging trends.

The committees that determine positioning are comprised of experienced individuals and supported by exceptionally well-resourced teams across both the equity and fixed income groups of Vanguard. This teams-based approach enables Vanguard to provide 24-hour portfolio management for each fund.

With no formal benchmark for performance comparison, Vanguard says the objective of these funds is for investors to gain exposure to a diversified portfolio while maintaining the split between equities and bonds.

So far, 2024 has seen the beginnings of a return to a more normal negative stock/bond correlation, meaning bonds may once again play their role of strengthening diversification in a multi-asset portfolio.

With inflation cooling and central banks starting to cut interest rates, this simple passive solution which blends exposure to both equities and bonds may be a safe option for investors seeking broad market exposure going forward.

What does the fund invest in?

Vanguard will be best known to many for passive investing. It’s founder, Jack C. Bogle, previously used a simple analogy to express his belief in this form of investing, “Don’t look for the needle, buy the haystack”.

This approach is reflected in the LifeStrategy range, with each fund holding between 6,000 to 20,000 shares and bonds from around the world by combining multiple individual Vanguard index funds into one fund. The resulting portfolios are highly diversified, helping to reduce your risk.

The three funds have different asset-class exposures, depending on the degree of risk that an investor is willing to take, which is clearly labelled in the fund’s name.

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The 20% Equity fund, the most cautious of the three, has the lowest equity allocation and is suitable for shorter-term investing (between three to five years) and for investors with less tolerance for risk.

The funds with a higher equity content (60% Equity and 80% Equity) should be held for the medium to longer term by investors with a higher tolerance for risk.

The funds are automatically rebalanced daily to ensure the original balance of shares and bonds is adhered to. The funds are constructed simply with the aim of balancing risk and return. Over time, the expected return from the equity portion of the portfolio will be higher than that of the bond allocation, which offers a defensive element.

The primary purpose of the allocation to bonds is to reduce the risk of the overall portfolio and the funds offer a diversified exposure to both short and longer-duration bonds, which provides safety and income. The high quality of the bonds mitigates credit risk.

A point worth noting is the “home bias” Vanguard implements across the range. UK equities represent a 25% share of the equity allocation in each of the funds, far more than the MSCI World, which currently holds 4% in UK equities, for example.

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Vanguard has previously stated that the overweight position to the UK is a result of demand from UK investors. Having less invested in the US than a global stocks tracker will have no doubt constrained the performance in recent years, however the home bias towards the UK in the equity book is in line with peers. This may prove beneficial should valuations revert to nearer historic norms, or act as a buffer if the US experiences a correction.

The allocation to UK bonds is currently 33%. However, diversification is less of an issue in government bond markets relative to equity markets. UK gilts also offer no currency risk, which is an additional benefit to this allocation.

How has the fund performed?

Since the inception of the range, each fund has achieved a strong long-term track record compared with their respective peers.

Over 10 years, the 80% equity fund has achieved an annualised return of 8.4%, which was 3 percentage points higher than its Morningstar category. The 60% and 20% equity funds also surpassed the returns of their Morningstar categories by 2.6 and 0.5 percentage points respectively.

Morningstar Total Returns (GBP) to 31/08/2024. Past performance is not a guide to future performance.

When the equity market is performing well, it’s typical for the funds with a higher equity content to outperform, and the superior returns achieved by the funds with a higher equity content is evidence of this.

In times of equity market weakness, the funds with a larger bond holding are expected to outperform given the historical inverse relationship between equities and bonds.

This has historically been true for this fund range, however 2022 proved to be an exception and a difficult year for global equities and bonds alike.

The breakdown of this correlation led to the 20% equity fund falling -15.8% and underperforming the 60% equity and 80% equity funds, which fell -11.2% and -8.8% respectively.

During 2022, the fixed-income allocation suffered due to interest rates rising, which causes bond prices to fall. The funds’ higher allocation to UK bonds further detracted from performance as they finished deeper in negative territory than global bonds. Simultaneously global equity markets were hit, which caused further suffering to the 20% equity fund. However, performance since 2022 has begun to recover across the range, with markets normalising, and the higher equity funds are now outperforming again.

Morningstar Total Returns (GBP) to 31/08/2024. Past performance is not a guide to future performance.

The breakdown in correlation in 2022 led some investors to question whether the traditional arrangement of constructing a portfolio combining equities and bonds is outdated, with alternative assets such as commodities and property becoming widely held in many multi-asset funds.

Vanguard constantly reviews correlations between asset classes and remains confident in the equity/bond split, which has performed well over previous market cycles. They expect the role of bonds going forward to continue to be important in minimising volatility and providing a varied source of return.

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The yields currently on offer to bond investors are far superior compared to those over the past decade, which implies higher returns.

The downward trajectory of rates may also be a positive development for bond investors. The US Federal Reserve recently began the interest-rate cutting cycle, which has historically been followed by a period of strong returns in many parts of the fixed income market.

Why do we recommend this fund?

The Vanguard LifeStrategy fund range provides investors with a simple and effective solution for accessing global markets regardless of their risk appetite. In terms of simplicity, LifeStrategy’s passive low-cost approach will continue to appeal and offers investors great value for money.

The strategy of keeping the asset split constant and keeping costs at a minimum has served investors well across market cycles. When considering which fund to select, investors should note that when the equity market is performing well, it’s typical for the higher equity content to outperform and, over periods of decades, a higher equity allocation will almost certainly outperform a bond portfolio.

The latest fund factsheets can be viewed here:

Vanguard LifeStrategy 20% Equity

Vanguard LifeStrategy 60% Equity

Vanguard LifeStrategy 80% Equity