How to build your own ‘LifeStrategy’ fund and cut costs

Creating a custom portfolio of tracker funds can achieve the same result as Vanguard – but there are hidden costs.

One-stop shop portfolios appeal to investors who are looking for a simple way to own stocks and bonds from all corners of the investment universe without buying other funds or trusts. This will particularly appeal to those at the start of their investment journey – investing their first £1,000 – for example.

Alternatively, such portfolios could be used as a core holding to which more adventurous holdings could be added later.

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Vanguard’s LifeStrategy range is the market leader, with around £30 billion managed for British investors at a cost of 0.22% a year, which is £2.22 on a £1,000 investment. BlackRock’s MyMap range does a similar job for 0.17%. The funds are made up of passive fund building blocks – with the underlying investment mix varying depending on risk. The more adventurous the fund, the higher the weighting to shares.

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Given how the funds are structured, investors can build their own versions and cut costs. They can also tweak a portfolio to reflect their own market views.

We look at how to do it and whether it is worth the effort. 

What does LifeStrategy own?

Vanguard’s portfolio is a basket of its own index funds. There are five funds in the range with different equity weighting: 20%, 40%, 60%, 80% and 100%. Three of the funds (the 20%, 60% and 80% versions) form part of interactive investor’s Quick-start Fund ideas for beginner investors.

The 100% Equity strategy contains 10 funds, while its 80% Equity fund owns 14. The balance is held in bond funds. Individual costs range from 0.06% for its UK tracker to 0.23% for its emerging markets index.

Overall, its 100% Equity fund has about one-third invested in America, a quarter in the UK, and the rest spread globally, including emerging markets and Japan.

Bond exposure is comprised of trackers for corporate, government and index-linked bond funds.

BlackRock’s MyMap range does a similar job but using its own iShares range of tracker funds for the building blocks. It has five options, ranging from a quarter in stocks to everything in stocks.

One difference is that BlackRock also gives investors access to alternative assets, such as commodities and real estate.  

How to replicate it

For a broad basket of global shares, the cheapest option is the L&G Global Equity ETF, which charges 0.1%. This exchange-traded fund (ETF) tracks the Solactive Core Developed Markets Large and Mid Cap Index.

Slightly more expensive is the SPDR MSCI World ETF. It tracks the MSCI World Index, composed of around 1,500 companies across 23 developed markets, for just 0.12%.

Generally, it is more expensive to track emerging markets as the index is less frequently traded and composed of less liquid stocks.

However, that is not to say exposure cannot be achieved at a reasonable price. The HSBC MSCI Emerging Markets ETF charges 0.15% to track an index composed of around 1,400 large and mid-cap emerging market stocks.

For the same ongoing charge, investors can also access emerging market shares without China, which currently accounts for around 30% of the index. The Lyxor MSCI Emerging Markets Ex China ETF charges 0.15%.

The cheapest way to access the UK market is the Lyxor Core UK Eq All Cap ETF, which charges just 0.04%, making it one of the cheapest ETFs available to UK investors. It tracks the Morningstar UK Index rather than the FTSE 100. Whereas the FTSE 100 is the largest 100 companies listed in the UK, the Morningstar index has more than 300 constituents, giving it both large and mid-cap exposure.

The cheapest way to gain passive exposure to US stocks is not through an ETF tracking the flagship S&P 500. Instead, it is the Lyxor Core US Equity ETF, which charges just 0.04%. It tracks the Morningstar US Index, comprised of almost 700 stocks.

The next cheapest ETFs for the US market are the Invesco MSCI USA ETF and the Invesco S&P 500 ETF, with both charging just 0.05%. These are the two cheapest ways to gain exposure to either the S&P 500 or the MSCI USA Index.

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Should you do it?

The cost of LifeStrategy is greater than the sum of its parts but investors benefit from Vanguard taking an active position on which markets are most attractive. It also “rebalances” the fund regularly so it does not become too heavily skewed towards one region.

For example, it has about a quarter in the UK compared with just 4% for a typical global shares tracker. Its one-third invested in America pales in comparison to the 69% share of a global index.

Backing cheaper British stocks may turn out to be the right call, but it has cost investors over the past decade as America’s technology giants have kept growing rapidly. A retail investor building their own portfolio can take a view on which market might perform best.

Trading costs can also add up for retail investors going it alone, which will become a drag on performance. However, given that it is possible to roughly cut fees in half, investors comfortable building their own passive portfolios can make savings that will add up over long investment periods.