Looking under the bonnet of low-cost diversified funds

The list of most-popular funds each month is provided by interactive investor, ranking the most frequently purchased ‘buy’ funds.

June’s numbers highlight persistent favourites from Vanguard, three funds from the LifeStrategy range making it into the top ten of active and passive fund purchases. The most popular of these was the Vanguard LifeStrategy 80% Equity fund, with the other two funds being the 100% and 60% variants, which have higher and lower allocations to equites.

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What makes these funds so popular?

Performance is one aspect, but the Highly Rated Funds tool within the Fund Ideas section of the ii website for customers also highlights these funds as holding Gold Medalist Ratings (the highest) from the ii research and data provider, Morningstar. These ratings are deigned to be forward-looking assessments of individual funds based on qualitative and quantitative assessments from their analysts.

The Vanguard LifeStrategy funds benefit from a straightforward asset-allocation approach and low-cost index funds. The portfolios maintain a largely static allocation between equities and fixed income investments, avoiding tactical asset allocation, active management, and niche asset classes. Morningstar analysts additionally highlight the consistent process, strong governance structure and Vanguard’s high-quality underlying index funds. Long-term results have been strong, while cost competitiveness is a key advantage, with fees among the lowest in the category.

The Vanguard funds are therefore highly regarded, but we have all heard the phrase ‘don’t put all your eggs in one basket’ and this is very applicable to investing where future uncertainties abound.

• The Analyst: how to enhance your Vanguard LifeStrategy exposure

Alternatives to the popular Vanguard funds

The Highly Rated Funds tool provides some suggestions. Within the multi-asset space (where Vanguard’s 80% and 60% funds reside), Morningstar’s analysts also rate funds from both BlackRock and L&G, with both groups also holding Gold Medalist Ratings.

BlackRock MyMap funds focus on passive index implementation but employ active asset-allocation decisions in a risk-targeted framework. Rather than targeting fixed equity or bond weights, the strategies target volatility ranges and allocate dynamically across asset classes within that. The process is predominantly quantitative, using valuation, momentum, sentiment, and other signals, while allowing experienced lead manager Rafael Iborra discretion to override model outputs when appropriate.

The portfolios typically use 15-25 iShares funds and have a lower UK bias and higher US exposure than peers. There are also modest allocations to alternatives such as gold. Morningstar analysts highlight the strength of BlackRock’s risk-management framework, supporting research platform, the positive contribution from asset-allocation decisions and very competitive pricing.

A similar approach is adopted by the L&G Multi-Index range, which offers actively managed, risk-targeted multi-asset strategies that seek to meet a defined volatility range through strategic asset allocation, dynamic asset allocation, and instrument selection. The approach is again implemented primarily through low-cost in-house index funds, where the group has expertise, but this is supplemented by selective active exposures in areas such as high-yield bonds and property.

The portfolios are more regionally diversified than many peers, with lower US exposure and meaningful allocations to Europe and Asia. There are also allocations to areas such as property, infrastructure, commodities, and thematic investments. Morningstar views the strategies positively due to the experienced and well-resourced multi-asset team, disciplined decision-making framework, and long-standing consistency of execution.

How do the fund ranges differ?

Drawing out the differences between Vanguard and these alternative products, the most obvious difference is that the BlackRock MyMap and L&G Multi-Index funds take a more active asset-allocation approach than Vanguard LifeStrategy products through the volatility band targets and tactical asset allocation. And some success has been seen in this area from both managers.

In addition, the L&G products clearly have more levers to pull, with allocations to alternatives, property, thematic exposures, and selected active funds. This contrasts with the Vanguard focus on equities and fixed income investments, with a large part of the latter being invested in government bonds.

Geographically, BlackRock funds exhibit the strongest US equity biases and the lowest UK home biases. This leaves equity allocations closer to mainstream global indices but further from peer group averages where a bias to the home market remains, albeit at a lower level than seen in the past. L&G deliberately maintains greater regional diversification and lower US exposure.

Costs are a key factor in fund investing and this is an area where both Vanguard and BlackRock funds excel. The Vanguard LifeStrategy fund range has a yearly fee of 0.2%, BlackRock MyMap comes in at 0.17%, while L&G Multi-Index has ongoing charges ranging from 0.34% to 0.36%.

As the above illustrates, popular funds are often well-regarded for valid reasons – simplicity, expertise and cost in the case of Vanguard. But the ii Highly Rated Funds tool is worth investigating and can help you uncover equally compelling opportunities.

Simon Dorricottis Director in the Manager Selection team at Morningstar.