Vanguard LifeStrategy’s four-point investment formula

Sam Benstead interviews Vanguard’s LifeStrategy product manager Mohneet Dhir.  

Dhir discusses the performance of the fund range, and delves into the four key investment principles they attempt to deliver on: cost, discipline, goals and balance.  

She also speaks about the economic environment and how investors can navigate it, including the performance of bonds.  

Vanguard LifeStrategy 80%, 60% Equity and 20% Equity are on ii’s Super 60 list of recommended funds.  

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Sam Benstead, fixed income lead, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Mohneet Dhir, product manager of Vanguard’s LifeStrategy range. Mohneet, thanks very much for coming into the studio.

Mohneet Dhir, product manager of Vanguard's LifeStrategy range: Happy to be here, Sam.

Sam Benstead: It’s been two years since we had you in the studio. So, how has the LifeStrategy range performed since then?

Mohneet Dhir: The last two years have obviously been extremely volatile, and as you know, it’s been a bit of a roller-coaster ride for clients. There's been a lot going on. There’s been geopolitical crises, the world recovering from Covid, political movements across the world and developed economies. So, in a nutshell, a lot going on, and markets have been extremely volatile responding to that.

Now, when we look at the LifeStrategy funds in that environment, they’ve actually done really well for investors who’ve had the discipline to remain invested in the LifeStrategy funds that they have exposure to. So, Vanguard LifeStrategy 20% Equity, for example, in the last two years has returned just over 10%. And then when we go up the equity spectrum, that number goes up, and going up all the way to Vanguard LifeStrategy 100% Equity, the return has been just above 34%. So, quite a strong return.

Sam Benstead: You have this range of funds ranging from 20% in equities and 80% in bonds, up to everything invested in equities. So, how are they managed? And have there been any changes in how they’re managed over the past couple of years?

Mohneet Dhir: LifeStrategy funds are essentially designed based on our four key investment principles. The first one is cost. Trying to keep the cost low. As many of our investors will know, we always try and find small cost efficiencies so we can pass more return back to investors.

The second [principle] is discipline. The strategic asset allocation that the funds apply essentially means that it forces people into having the discipline to maintain their asset allocation. And what that really means is that we don’t move the goalposts when markets get volatile because market timing in the short term can be a very dangerous thing for investors.

Now the third one is goals. So, essentially giving people the options to be able to find the right LifeStrategy fund for them according to their own goals.

And lastly, it’s balance. So, finding that balance in a multi-asset portfolio through equities and bonds and having the right split, as well as having the global diversification that you get through that split.

For LifeStrategy funds, we have five different products starting from LifeStrategy 20, which is 20% equities, 80% bonds, and then it goes up in 20% increments of LifeStrategy, so Vanguard LifeStrategy 40% Equity, Vanguard LifeStrategy 60% Equity, Vanguard LifeStrategy 80% Equity and 100%.

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Sam Benstead: 2022 was a difficult period for many investors. We saw interest rates rise and this actually had a very negative effect on bonds. We had an unusual environment where funds with more bonds performed worse than those with more equities, which is not what you would hope if you were trying to be a defensive investor, not keep more to fixed income. So, why did this happen and could it happen again?

Mohneet Dhir: I think it’s important for investors to remember that 2022 was not just driven by one event. It was a very toxic environment of multiple different things going on. You had a geopolitical crisis, the world was still recovering from Covid, and you had years and years, decades, of extremely low policy rates. The effect of which was building up over all these years.

On top of that, obviously in the UK in particular, you had the Liz Truss debacle, which sent bonds into a downwards spiral. But you could see how nervous the market was, and it wasn’t just one factor that led to that, it was many different factors.

The good thing, however, is that it was short-lived in the broader sense of, if we zoom out a little bit [to look at] the history of markets over the last five, 10, 20 years, that negative performance period [for] bonds was so short when you look at the big picture.

Now this year, obviously, and last year as well, we’ve already started to see bonds recover as central banks move into a lower-rate environment compared to where we were in 2022.

Sam Benstead: And are we therefore in a more normal economic environment at the moment compared to the past few years? Inflation is low, interest rates have probably peaked and are now coming down.

Mohneet Dhir: In some sense, yes. So, with policy rates in particular, we are starting to see policy rates coming down now. But we don’t think we’re in a normal economic environment, and we’ve been telling investors this for the last few years, [since] probably around Covid times. You started talking a little bit more about this, because even when you think about Covid, there are after-effects. If you think about how much governments borrowed - what does that do to the underlying market? What does that do to the economics of different countries?

The reality is that we’re not in a normal economic cycle, which means that there's more uncertainty. It also means that there's potentially more volatility, which is why having a fund like LifeStrategy, which forces that discipline, in a way, through strategic asset allocation, along with having that balance and diversification of being invested globally, will help investors right through this volatile, uncertain period.

Sam Benstead: Looking ahead to 2025, what should investors be worried about? What is abnormal about this environment, and how should that impact their investment journey?

Mohneet Dhir: Unfortunately, there's not one factor similar to [what] we saw in the last few years. We do think some of the factors [over] the past few years have gone away, especially in terms of extremely high monetary policy rates. Now we're starting to see central banks cutting rates into that cycle.

However, when we look on the geopolitical side, for example, there is obviously increased risk. Again, whether it's within the Middle East or the effect of Trump's tariffs in 2025, and what impact that then has on inflation and growth. All this really does introduce uncertainty into the market in 2025 potentially.

Unfortunately with these things, especially with fiscal policy measures that we see out of the US, the impact is never easy to see straight away. It takes time because fiscal policies then, realistically, take time to get implemented and [for] the effect of that to then show through in economic data takes time as well.

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Sam Benstead: We've seen a big rise in the popularity of bonds on our platform and the LifeStrategy range is a very common way for people to get exposure to those bonds. Bonds had a bad run in 2022. They're now starting to perform better and offer better yields. So, why is fixed income important for a balanced portfolio?

Mohneet Dhir: 2022, in a way, was obviously very painful for some bond investors, bond-heavy investors. However, those who did [have] the discipline to remain in their investment did benefit over the last few years. Because, as we've seen, bonds have had this strong period of performance in 2024 and in 2023 as well.

So, we do think bonds are back, especially when you're looking at a policy rate environment where rates are coming down. Bonds obviously do benefit from that with bond prices going up.

What's interesting this time around is that even though we're expecting policy rates to come down, we think the average level of rates going forward [will] be higher than what we've been used to. So, since the financial crisis, rates have been close to almost zero and negative in some cases. But going forward, we think that's going to be more around 3%, 3.5%. Now, from a yield perspective, that's very attractive.

So, fixed income has become an even stronger ballast in a multi-asset portfolio, and potentially going forward with that additional yield component built in, which you didn't really have post-financial crisis. So, it’s still doing its job, but it can do its job even better as a defensive element in a portfolio.

You’ve got potentially more income through higher coupons and bonds because of the higher yield. You’ve also obviously got that potential overall yield of your fixed-income portion going up. So, the potential income you can earn on your bonds per unit of risk that you take has gone up, which is very attractive for a fixed-income investor and for a multi-asset investor with fixed income in their portfolio.

Sam Benstead: Looking ahead across the LifeStrategy range, are there any forecast returns that we could give to customers? What is the range of returns you could get from the different types of strategies that you offer?

Mohneet Dhir: The last forecast we have is as of June 2024. Looking forward to the next 10 years from that point onwards, our models are forecasting that a LifeStrategy investor could get returns of anywhere between 5.3% going up all the way to potentially 5.7%, 5.8%.

That’s quite a strong return without having to tinker with your portfolio, or try to make asset allocation changes or try to time markets. That’s based on strategic asset allocation and having the discipline to hold [the] Life Strategy exposure that you have, depending on which fund you’re in.So, 5.3% is for LifeStrategy 20% Equity, then going up all the way to LifeStrategy 100, at about 5.7%, 5.8%.

Sam Benstead: Mohneet, thanks very much for coming into the studio.

Mohneet Dhir: Thank you so much.

Sam Benstead: And that's all we've got time for today. You can check out more Insider Interviews on our YouTube channelwhere you can, like, comment and subscribe. See you next time.