Investment firm Vanguard has come to dominate the passive fund market and its LifeStrategy line has proven to be extremely popular since its launch ten years ago.

It offers a number of options to investors for stocks and bonds and in some cases may be the only fund they hold.

While LifeStrategy funds may not promise the kind of above-market earnings some more experienced investors hope, they have proven popular with more conservative savers. And thanks in large part to the monetary policy that boosted bond prices and the outstanding performance of the US stock market, they also generated strong returns.

Vangaurd’s LifeStrategy funds are designed to provide a balanced portfolio to cope with rising and falling markets and have proven to be very popular.

Vanguard’s LifeStrategy range provides low-cost exposure to a portfolio of stocks and bonds and its five funds are now worth £ 29 billion.

“Vanguard’s LifeStrategy line has hit the bottom of active managers over the past decade, with the five funds beating their industry average and mixed-asset funds in the top quartile of funds in their industry,” Laith Khalaf , financial analyst at AJ Bell mentioned.

Funds have benefited from strong economic conditions, but now that some of these favorable winds are changing direction, investors may also consider adding active fund options to their portfolios.

Vanguard funds hit by bond sale

Over the past decade, Vanguard’s LifeStrategy funds have performed well, outperforming the industry average in every instance.

The LifeStrategy 20% Equity fund has been the best performing fund in its sector over the past decade, due to its weighting in bonds. Active managers, to their detriment, have tended to be underweight long-term government bonds.

While bond yields have been dragged down by interest rate cuts and massive quantitative easing purchases from central banks, their prices have risen.

However, Vanguard’s four mixed-asset LifeStrategy funds, which have defined bond exposure, have suffered from the recent bond sale, prompted by the vaccine rollout and more positive economic outlook.

‘[It has] has hampered the recent performance of LifeStrategy blended funds relative to active managers, as the latter can reduce their exposure to bonds or the sensitivity of their portfolio to rising interest rates by investing in shorter-term bonds, ”said Khalaf.

“Although the LifeStrategy range has shown excellent results over ten years, it is fair to stress that this entire period has been characterized by lax monetary policy and a buoyant bond market.

“If we enter a period of more inflationary pressures and tighter monetary policy, LifeStrategy funds may find that their fixed exposure to long-term bonds makes it more difficult to perform,” Khalaf added.

Vanguard LifeStrategy Performance Analysis
Funds % Total Return – 1 year % Total Return – 10 years Sector rank – 1 year Sector rank – 10 years
LifeStrategy 20% equity 3.1 73.6 62/64 1/28
Mixed IA 0-35% Equities Sector Average 6.3 47.1
LifeStrategy 40% equity 7.4 97.4 157/172 5/90
IA Mixed 40 to 60% Sector average 11.7 65.1
LifeStrategy 60% equity 12.0 123.6 164/188 15/100
LifeStrategy 80% equity 16.7 151.0 69/188 5/100
Mixed IA 40-85% Sector average 15.6 94.3
LifeStrategy 100% equity 21.4 179.2 277/432 118/196
Global IA Sector Average 23.3 174.4
MSCI World Index 22.0 224.9
Source: Total return FE from 06/23/2011 to 06/23/2021 and from 06/23/2020 to 06/23/2021

Inflation signals are multiplying and rapidly in the UK and around the world as businesses reopen and the economy warms.

The latest UK consumer price index showed inflation jumped to 2.1% in May from 1.5% in April. This is the first time that inflation has exceeded the Bank of England’s 2% target in two years.

As a result, most of LifeStrategy’s mixed assets have recently appeared in the fourth quartile of their respective sectors.

The LifeStrategy 80% fund was the exception, outperforming the sector. However, its allocation to stocks is at the top, which means that its performance is largely dependent on the performance of the markets.

Elsewhere, the 100% Equity fund also took a hit, only slightly outperforming the sector and actually underperforming the MSCI World Index. This is because the fund is 100% equity and has not benefited from exposure to bonds like Vanguard’s mixed-asset funds.

The fund also has a quarter of the share of equities invested in UK stocks, well above the market weight. This exposure pulled the fund down as the MSCI World Index soared thanks to the strength of its exposure to the US market.

The 60% Equity LifeStrategy intermediate fund posts a solid 5-year performance

The 60% Equity LifeStrategy intermediate fund posts a solid 5-year performance

What are the rivals of the LifeStrategy tracker?

Vanguard’s main passive competitor is Blackrock’s Consensus range which, rather than taking a fixed allocation to stocks and bonds, tracks the average asset allocation of UK pension funds.

Launched in 2012, it also offers an annual fund fee of 0.22 percent, which Khalaf says is “decent value.”

For 100% equity funds, he suggests that investors switch to a global index tracker like the Fidelity Index World fund or the Lyxor Core MSCI World ETF to reduce these annual fees to 0.12%.

Vanguard also offers a cheaper global tracking product through its Vanguard FTSE Developed World ETF, which is available at the same price.

Investors can also consider active funds

For some investors, the Vanguard LifeStrategy fund could represent their entire portfolio. But others may want to see it as the heart of their portfolio and add actively managed satellite funds, especially when the economy starts to recover and that causes a shift in the bond market.

Options could be to add global funds with a strong track record of investing in stocks, such as Scottish Mortgage, Fundsmith or Lindsell Train Global Equity. Or investors who want to target a specific sector or region, such as small UK businesses, Japan or emerging markets, could also add funds or specialized trusts for this.

Alternatively, others may wish to add an active fund that also invests in stocks and bonds, but they should check if they are just duplicating what their LifeStrategy tracker is doing.

Tom Mills, senior investment analyst at Hargreaves Lansdown, said some investors might consider a total return fund that focuses on generating positive returns under a variety of conditions, varying its exposure rather than maintaining a fixed asset allocation. .

BNY Mellon Real Return aims to produce a total return of 4% and is relatively conservative.

“Over the long term, the fund is aiming for moderate growth while providing some shelter from the worst stock market downturns,” said Mills. “The team is putting more emphasis on not losing money rather than making money, so we don’t expect the fund to accelerate in rising markets.

Another option for conservative investors is Personal Assets Trust and Rathbone Total Return, which offer a blended portfolio of assets managed by an active manager.

“They won’t turn off the lights when animal spirits are high, but their slow and steady approach will mean a smoother trip than the market can provide,” Khalaf said. “They have a larger toolbox than LifeStrategy funds for navigating markets, using other assets like gold and cash in the portfolio.”

However, they come with higher annual fees: 0.57% for Rathbone Total Return and 0.73% for Personal Assets Trust, compared to 0.22% for LifeStrategy funds.

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