Vanguard LifeStrategy range: can active multi-asset funds compete?

Over the past decade, the LifeStrategy fund range has trounced most active multi-asset funds. 

It has been a notable decade for Vanguard’s LifeStrategy fund range. Since launching in June 2011, these low-cost, passive multi-asset funds have trounced most of their active peers – attracting more than £34 billion in the process.

Vanguard’s ready-made portfolios hold a collection of index funds and exchange-traded funds (ETFs), and are effectively managed by a computer. Each LifeStrategy fund holds a different proportion of shares, ranging from 20% to 100%, with the remainder in bonds. Three of the funds; the 20% Equity, 60% Equity and 80% Equity versions form part of interactive investor’s Quick-start Funds range that offer a simple starting point for investors.

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Over the years, investors have been drawn to the funds’ low charges and simple approach. Each portfolio has an ongoing charges figure (OCF) of only 0.22%, which includes the annual management fee and total expenses paid by the fund. By comparison, a typical OCF for an actively managed multi-asset fund is around 1%, according to Defaqto. Multi-manager funds, which invest in other funds, tend to be even more expensive with an average ongoing charge of 1.14%.

What’s more, performance across the LifeStrategy range has been stellar over three, five and 10 years. The LifeStrategy 20% Equity fund, which allocates 20% to shares and 80% to bonds, has outperformed all its actively managed peers over the 10 years to the end of August, according to Morningstar’s data. The fund returned 77.5%, which compares to 52.6% by the average fund in the Investment Association’s Mixed Investment 0-35% Shares sector.

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A similar trend is in place for most of the other funds in the range. Over the 10-year period, the LifeStrategy 40% Equity fund outperformed 94% of its active multi-asset competitors with a 105.8% return. The 60% Equity strategy beat 84% of its peers with a 138.5% rise, while the 80% Equity fund outperformed 93% of active competitors with a 174.6% gain.

This success rate tails off for the LifeStrategy 100% Equity strategy, which beat only 46% of its active peers. Its returns are impressive nonetheless: the strategy is up 213.4% over the 10-year period.

Active funds fall short

In light of LifeStrategy’s decade of success, some investors question whether active multi-asset funds – whose main goal is to outperform the market – are actually capable of achieving what they set out to do.

Paul Lothian, a director at financial advice firm Verus Wealth, is one such critic. He believes there are far too many sub-standard active multi-asset funds out there.

“Vanguard’s LifeStrategy range is successful because it provides market returns at a low cost, almost inevitably outperforming the majority of more expensive competitor funds over reasonable time periods,” he says.

In his opinion, active multi-asset funds tend to hug or lag their benchmarks on account of their higher costs. For example, an investor can end up paying an extra 70 to 80 basis points in charges in comparison to the LifeStrategy range, which puts these active funds at a notable disadvantage from the start.

Nick Lincoln, founder of Values to Vision Financial Planning, echoes these sentiments, commenting: “There is no place for active multi-asset funds. Net of costs you are going to trail the market and that is what Vanguard have proven.”

Adam Millson, manager research analyst at Morningstar, says the success of the LifeStrategy range illustrates the difficulty active managers have had in outperforming the index over a full market cycle.

Part of the reason behind this, in his opinion, is down to active funds’ tendency to incorporate tactical tilts to express shorter-term views – and these can be hard to get right consistently over the long run.

This leads to the question, is passive the best or only way to approach multi-asset investing?

Lee Smythe, managing director of financial advice firm Smythe & Walter, believes the issue is more nuanced. While he holds Vanguard LifeStrategy’s range on behalf of a wide number of clients and is happy with the returns, he says this does not preclude active multi-asset funds from delivering too.

“While the LifeStrategy range has performed well over the last 10 years, everything is relative. Although I would hope that our clients are pleased with the results, they would not see Vanguard as the particular ‘standout’ holding in their portfolios,” he explains.

Smythe says investors should consider holding active multi-asset funds because of their potential to outperform passive options by taking a more proactive investment approach – and his clients’ investments in the Liontrust Sustainable Future and Royal London Sustainable fund ranges have done just this.

“These funds have significantly outperformed the corresponding Vanguard LifeStrategy funds over three, five and, where available, 10 years,” he adds.

The negatives

It is important to consider the potential drawbacks associated with Vanguard’s LifeStrategy range. Lothian highlights the funds’ allocation to UK shares, which looks relatively high - around 25% of total equity exposure in comparison to peers. It is a similar story when it comes to bonds too, with the UK accounting for 35% of the total allocation.

The funds’ international bond investments are hedged back to sterling, which helps to minimise potential volatility. However, this can also prove to be painful when sterling falls against the dollar, Lothian adds.

Lincoln also has reservations about allocating too much to bonds in the current environment.With bond yields at low levels, this translates to disappointing levels of income. In addition, many investors expect yields to rise over time, which creates the potential for prices to fall (as the two move inverse to each other), which means you could end up locking in a capital loss.

“We tend to hold nearly all equity funds, as bonds don’t retain their purchasing power,” Lincoln says.

Nevertheless, for investors who believe that bonds deserve a place in the portfolio and are looking to outsource investment decisions, Lincoln describes the LifeStrategy funds as a “marvellous one-stop-shop”.

The ups and the downs

Investing via index funds and ETFs means investors must be prepared to feel the brunt of both the highs and lows experienced by markets. For investors who are willing to take a long-term view, Lincoln says market falls should not represent too much of a concern.

“Every five to seven years, the markets experience a temporary decline of around 30%. You can’t time that event because you don’t know what will cause it, how severe it is going to be, or how long it will last.

“The only way to pick up the permanent advance is by weathering the temporary decline. There have been 11 bear markets since the Second World War and the S&P has compounded at something like 12% per year. These falls are totally irrelevant for long-term investors. They are just fodder for market timers,” he reflects.

Following a strong decade, one final question remains: can Vanguard LifeStrategy repeat its success?

Smythe suspects so: “I would expect the Vanguard LifeStrategy funds to continue to deliver similar results going forward. While market conditions have been relatively favourable over the last 10 years, there have been bumps along the way and the funds weathered these pretty well compared to some active options.”

Whether LifeStrategy continues to dominate is another matter, however. Today, there are lots of alternative passive multi-asset options out there which could give LifeStrategy a run for its money.

One example is HSBC’s Global Strategy range, which invests across different asset classes via index funds and ETFs. It has even lower OCFs in comparison to LifeStrategy, ranging from 0.17% to 0.21%, and has achieved impressive returns so far.

“These funds have tended to outperform Vanguard on a like-for-like basis over three and five years,” Smythe concludes.

For example, the HSBC Global Strategy Balanced Portfolio has returned (to 15 September) 52.9% over the past five years, which compares to 47% by the LifeStrategy 60% Equity fund, according to Trustnet.