Interactive Investor

Vanguard LifeStrategy funds: everything you need to know

11th August 2022 09:45

by Kyle Caldwell from interactive investor

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Three of the five funds in the Vanguard LifeStrategy range – 20%, 60% and 80% - form part of interactive investor’s Quick-start Funds ideas for beginner investors. The trio are also members of interactive investor’s Super 60 funds.

Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to the latest in ourInsider interview video series. Today, I'm joined by Mohneet Dhir who is a product specialist on the Vanguard LifeStrategy Fund range. Mohneet, thanks for joining me today.

Mohneet Dhir, product specialist on the Vanguard LifeStrategy fund range: Thank you, it's lovely to be here.

Kyle Caldwell:So there are five funds in the range. Could you run through how they invest differently from one another? And what are the main attractions of the Vanguard LifeStrategy fund range?

Mohneet Dhir: So the LifeStrategy Fund range has five different funds, as you mentioned. Each fund goes up in a 20% increment. So we start with 20% Equity and 80% bond for the first one. And then we go up to 40% Equity, 60% Equity, 80% Equity , and then 100% Equity. And what that allows us to do is offer investors a range of choices when it comes to different risk exposures or risk appetites, if you will. So someone with a higher risk appetite could potentially buy a LifeStrategy 80% Equity or 100% Equity, and vice versa for someone with a lower risk appetite. 

I think the reason that they've been so successful, and investors have continued to invest in them is the fact that the strategic asset allocation has been transparent and strategic in nature over time. And what that's allowed the funds to do is ride out any market storms that we've seen in the last 10 years, whether that's the global financial crisis, the euro debt crisis, Brexit, Covid more recently, and you can see that in the performance of the funds, they are one of the best-performing funds within the multi-asset universe in the UK.

Kyle Caldwell: So there's five funds in the range. Is it worth investors considering investing in more than one, or does that add complication and potentially unnecessary expense?

Mohneet Dhir: I wouldn't necessarily say that. So the LifeStrategy Funds, as I mentioned earlier, they do provide different risk balances, each one of them within the range. They all have the same approach to asset allocation. So they're all strategic in nature. So we're not tactically moving any of the asset allocation mixes around. So what that really offers investors is that depending on what your goals are from your investment.

So, for example, one investor may be investing for their child's university fees, which they will need in, say, 15 years. That investor obviously has a longer time horizon, and they could invest in something like the LifeStrategy 80% Equity Fund, which has a 20% bond allocation because that time period is longer, they can take a bit more risk with higher equity exposure. However, they could also be an investor. The same investor could have a different goal, which means that they need their investment back in five years time and are looking for X amount of growth. They could potentially look at investing in LifeStrategy 20% Equity or 40% Equity because their risk appetite would be lower given that their timescale was shorter. So you can, absolutely, one investor can absolutely invest in more than one fund.

Kyle Caldwell: How often are each of the funds rebalanced and what does that involve?

Mohneet Dhir: When we're thinking about rebalancing for the LifeStrategy Funds, we wanted to make the process as cost-efficient as possible, but still be very, very close on target to our asset allocation. So the 40% equity, 60% bond, for example, and what we try and do is use cash flows to rebalance. What that allows us to do is make the process cost efficient, because if you didn't get net cash flows on a daily basis and you were not using cash flows to rebalance you would have to sell existing positions, which obviously incurs a cost. And with the LifeStrategy Funds, we've been lucky enough that investors have had faith in the product. So we've had net cash flows over the last 10 years and we've been able to make the rebalancing process very efficient over time from a cost perspective, which has been great and still deliver on our asset allocation objectives.

Kyle Caldwell: The range has a bias towards the UK, both the equity allocation and the bonds allocation. Could you explain what the thinking was behind that?

Mohneet Dhir: So home bias is actually a very interesting topic and when we initially launched the LifeStrategy Funds, we did some research into investor preference for home bias. We looked at different dynamics of investing. We looked at this across the globe, not just in the UK. So countries such as Australia, for example, actually prefer a much higher home bias than investors prefer in the UK or in the US. So it's definitely a global phenomenon.

When we launched the fund we could see there was based on our research and based on our sort of client surveys that we did, we could see that there was a strong investor preference as well for having a home bias as well as our research supporting it. With that in mind, we decided to implement a home bias in the LifeStrategy Fund. So we hold 25% UK exposure on the equity side and 35% on the fixed income side. And that's also because investors prefer a higher home bias in fixed income than they do in equities. Based on our research and investor feedback.

Kyle Caldwell: The other thing that stands out is that the fund range is underweight US equities. So again, what's the thinking behind that allocation?

Mohneet Dhir: That's actually mostly driven by the UK home bias, so in order to be overweight to the UK, that slight extra percentage weight that you put on the UK obviously comes out of the other building blocks. However, having said that, despite the home bias, the LifeStrategy Funds are extremely diverse in the way that they invest. US is still one of our largest weights. And it's worth remembering that we invest in almost 49 countries across the LifeStrategy Funds, different credit ratings. We invest in different sectors within equities, different maturities for bonds. So this you still, despite the home bias, you do still get a lot of diversification. And hopefully if the outlook for the UK, as many economists are predicting, continues to be positive, this home bias should serve investors well going forward.

Kyle Caldwell: The funds have an ongoing charge figure of 0.22% per year. Since the fund range was launched over a decade ago fund charges have been reduced a couple of times to pass on economies of scale. How big do the funds needs to become for charge to be reduced further?

Mohneet Dhir: So yes, you are correct. Since we launched the funds just over 10 years ago, we have cut fees multiple times. And it sort of goes back to our philosophy of making sure the more we cut in terms of fees the more we can pass back to investors and every time that we've been able to lower fees, we're at a certain point where we think that the funds are scalable enough for us to be able to cut fees. And we believe that we're not at that point yet. Hopefully we get there soon if investors keep having faith in us and in the LifeStrategy Funds. But we do when we are thinking about fund management processes at Vanguard, we're always thinking about how can we evolve this? How can we make this more efficient in the way that we do things? How can it be more cost efficient? Which will eventually allow us to cut costs further.

Kyle Caldwell: And does the range factor in ESG (environmental, social and governance) factors, at all?

Mohneet Dhir: So the range isn't ESG per se. ESG itself is obviously can be quite subjective. We think that when you look at, when you think about good investing, so some of the companies that the underlying companies that the LifeStrategy Funds invest in through fixed income or through equities. We think that you know when our credit analysts, for example, on the fixed income side are looking at which corporate bonds, credit bonds to invest in, they're often looking at the management of the companies are looking at these companies conducting good governance practices. Is there any other any red flags from a social perspective? For example, in emerging market countries where there's issues with politics and leadership. So those factors should really be factored in, should already be part of your sort of research and analysis when your underlying funds are investing in companies, in different sectors.

However, having said that, we do have a multi-asset range which is more focused on ESG Sustainable Life Funds, which we launched recently as well. So that's something for investors to take a look at. And on the other hand, we do have a lot of things going on, on the stewardship side. We are quite active in the way that we approach stewardship. We are voting across multiple different companies and our engagement levels have increased over the years. And given that Vanguard has such a broad exposure to global markets, it puts us in a nice position to be great stewards of our investors assets.

Kyle Caldwell: Mohneet, thank you for your time today.

Mohneet Dhir: Happy to be here. Thank you for inviting me.

Kyle Caldwell: That's all we have time for, for today. You can check out the rest of our Insider Interview video series on the interactive investor YouTube channel where you can like and subscribe. Look forward to seeing you next time.

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