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The strength and weakness of Vanguard LifeStrategy

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A belated happy tenth birthday to Vanguard’s LifeStrategy range. The five funds have become a common sight: they frequently crop up in IC Reader Portfolio submissions and have taken in huge swathes of money. The range’s most popular fund, Vanguard LifeStrategy 60% Equity (GB00B3TYHH97), recently had more than £12.5bn in assets.

For those unfamiliar with them, the five funds each have a set allocation to equities, with the balance in bonds. The 20% Equity fund, for example, will have a fifth of its assets in equities, with the rest in fixed income. All of the investing is done via Vanguard trackers and each portfolio sticks to its set asset allocation.

The low cost and simplicity of this approach has been pretty alluring, and that’s part of why I myself am a LifeStrategy customer: I use one of the portfolios purely for the fact that it captures traditional markets and allows me not to think too much about fund selection outside of the day job. Investors have also been well rewarded, at least in the longer run: a recent AJ Bell analysis found that while the funds had a fairly weak showing versus rival funds in the year to 23 June, four of the LifeStrategy products had done extremely well against the most relevant Investment Association fund sectors over a decade. That’s testament to the resilience of government bonds, which have a decent presence in the LifeStrategy fixed income allocations. It also reminds us that passive has remained difficult to outmaneuver, especially in the past decade.

But let’s not forget to think twice about LifeStrategy’s potential weak spots. Rival funds have still done better in some areas: as AJ Bell notes, the range’s 100% Equity fund has lagged most peers in the IA Global sector over 10 years. This is most likely because LifeStrategy’s equity allocations deviate significantly from the make up of both the widely followed MSCI World index and the broader MSCI All Country World index, which gives some space to emerging markets. The Vanguard funds tend to go overweight on UK stocks and underweight the US. While the US makes up around two thirds of the MSCI World index, it only represented a fifth of assets in the 100% Equity fund at the end of April. This could remain a problem if the US continues to motor ahead in future.

As previously noted, the other LifeStrategy funds use a variety of bond exposures – something that may prove troublesome if inflation and interest rate rises are on the horizon. The funds’ bond holdings also tend to have relatively high levels of duration, a measure of interest rate sensitivity, something that has boosted performance in the last decade, but could hurt if rates rise. It should be acknowledged that Vanguard has previously put much of this duration down to the use of inflation-linked bonds. Separately, investors might note that certain rival passive multi-asset offerings, such as BlackRock’s MyMap funds, do make very limited use of other potential diversifiers, such as gold, alongside bonds. Wealth preservation trusts like Ruffer Investment Trust (RICA) go even further.

Finally, investors should remember that using just one fund from ranges like LifeStrategy should be enough to establish a core holding. We sometimes see readers using a handful of LifeStrategy funds together – something that adds unnecessary expense and complication.

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