Key Points:
- Vanguard LifeStrategy are multi-asset funds of global stocks and bonds.
- The range provides various products with distinct risk-return trade-offs, ranging from 20% to 100% equity exposure.
- The funds are actively managed but made up of passive ETFs.
- A notable concern is the heavy UK bias in these funds, which compromises global diversification.
- The funds come with a reasonable ongoing fee of 0.22%.
In this Vanguard LifeStrategy review we look at an investment you can set, forget, and get on with the more interesting things in life.
Long-term investing isn’t exciting. Nor should it be. If you’re getting hot under the collar about earnings calls or panicky about a slowdown in China, you’re probably drifting to the gambling side of the investment world.
The best thing you can do with boring parts of your life is automate them. Set them up once and then let them look after themselves. Outsource the tedium and circumvent the constant tinkering that causes stress and damages your long-term returns.
Vanguard’s Lifestrategy funds are multi-asset, meaning they are are made up of more than one type of investment vehicle (in this case stocks and bonds.)
The LifeStrategy Range
Every LifeStrategy product encapsulates a distinct risk-return trade-off. Lower equity funds such as the 20% and 40% are less volatile, offering a safer harbour during tumultuous market conditions. Conversely, higher equity funds, particularly the 100%, bear more market risk but with the allure of higher returns.
As you can see from the LifeStrategy performance comparison graph, the lower equity funds offer a smoother journey at the cost of long term return. During the down market shortly after the funds were created, the 100% equity fund was the worst performer for a decent chunk of time, whilst the funds with a higher bond ratio were more stable. As the bull market kicked in the high equity funds took full advantage.
Vanguard LifeStrategy 100
The LifeStrategy 100% Equity Fund is for those looking for a that contains share only. With an all-out equity exposure, this fund delivers the most potential for returns but can also exhibit significant market fluctuations.
Top Holdings
- Vanguard U.S. Equity Index Fund GBP Acc – 19.5%
- Vanguard FTSE U.K. All Share Index Unit Trust GBP Acc – 19.4%
- Vanguard FTSE Developed World ex-U.K. Equity Index Fund GBP Acc – 19.2%
- Vanguard S&P 500 UCITS ETF (USD) Accumulating – 15.1%
Vanguard LifeStrategy 80
Edging towards a more aggressive investment strategy, the Lifestrategy 80% Equity Fund is weighted heavily towards equities. Suited for those who have a high risk tolerance, this fund offers substantial growth potential but comes with heightened short-term volatility.
Top Holdings
- Vanguard FTSE U.K. All Share Index Unit Trust GBP Acc – 19.5%
- Vanguard U.S. Equity Index Fund GBP Acc – 19.3%
- Vanguard FTSE Developed World ex-U.K. Equity Index Fund GBP Acc – 19.2%
- Vanguard Global Bond Index Fund GBP Hedged Acc – 14.1%
Vanguard LifeStrategy 60
The classic 60/40 stocks/bonds portfolio. A steady hand at the tiller that occupies the middle ground in portfolio risk management.
Top Holdings
- Vanguard FTSE Developed World ex-U.K. Equity Index Fund GBP Acc – 19.4%
- Vanguard Global Bond Index Fund GBP Hedged Acc – 19.2%
- Vanguard FTSE U.K. All Share Index Unit Trust GBP Acc – 15.3%
- Vanguard U.S. Equity Index Fund GBP Acc – 15.2%
Vanguard LifeStrategy 40
A step down the risk ladder, the Lifestrategy 40% Equity Fund presents a balanced mix of 40% equities and 60% bonds. Taking risk off the board as you reach your twilight years is a prudent way of consolidating wealth as you approach a time you’ll need to start drawing on it.
Top Holdings
- Vanguard Global Bond Index Fund GBP Hedged Acc – 19.3%
- Vanguard FTSE Developed World ex-U.K. Equity Index Fund GBP Acc – 19.3%
- Vanguard FTSE U.K. All Share Index Unit Trust GBP Acc – 10.1%
- Vanguard U.K. Government Bond Index Fund GBP Acc – 8.8%
Vanguard LifeStrategy 20
With 80% of the fund made up of bonds, this is a steady, low risk play. Be aware that the limited growth potential means you may not achieve returns that stop inflation eroding your wealth.
Top Holdings
- Vanguard Global Bond Index Fund GBP Hedged Acc – 19.4%
- Vanguard FTSE Developed World ex-U.K. Equity Index Fund GBP Acc – 13.3%
- Vanguard Global Aggregate Bond UCITS ETF GBP Hedged Acc – 12.1%
- Vanguard U.K. Government Bond Index Fund GBP Acc – 11.8%
Performance
Mutual Funds vs ETFs
Vanguard’s UK LifeStrategy funds are not ETFs. The key difference is how they are traded:
- ETFs are traded on an exchange just like individual stocks and their price can fluctuate throughout the day based on supply and demand. You can buy and sell ETFs at any time during trading hours.
- Mutual funds, on the other hand, aren’t traded on an exchange. Instead, you buy and sell shares directly with the fund company, and these transactions only occur after the market closes each day, at the net asset value (NAV) price.
Vanguard LifeStrategy Fees
There are other differences the consider – in general mutual funds tend to be more expensive, although that is less of an issue with Vanguard. The LifeStrategy funds have an ongoing fee of 0.22%, and have no entry or exit charge. This is broadly in line with Vanguard’s equivalent ETFs, although a two-ETF portfolio of a stock and bond ETF is cheaper given the much lower cost of Vanguard’s bond ETFs.
Platform fees are the other side of the coin and worth bearing in mind. Many platforms don’t distinguish between ETFs and funds when calculating their fees. Vanguard’s platform fee of 0.15% applies to ETFs and funds alike. Although cheap, there are better value platforms that offer the LifeStrategy range.
Some platforms, such as Hargreaves Lansdown, cap their annual fee for ETFs and shares but not for funds, so you pay the full 0.45% per year regardless of your account size. Less of an issue for smaller accounts, and you do need to weigh the benefits of the tools and resources the HL platform offer. They do provide a completely fee-free Junior Isa, and a LifeStrategy fund might be a good low-maintenance option there. Check out our Hargreaves Lansdown review for more.
Minimum Investment
Mutual funds also generally have a minimum amount you need to invest. For a one-off investment in Vanguard’s LifeStrategy funds the minimum is £500. This falls to £100 if you set up a monthly direct debit.
Active vs Passive Management
Whilst it’s no longer true that ETFs are all passive index trackers, with no investment manager meddling behind the curtain, the vast majority of them still are. Funds like the LifeStrategy range are actively managed, meaning there is a fallible human making decisions on where to allocate the money.
Active management has well documented downsides, with the vast majority of active funds underperforming their benchmarks over the medium to long term. However, in the case of Vanguard’s LifeStrategy funds the additional risk is fairly benign.
As you see above, the funds that form the moving parts are all Vanguard’s own products, all of which reliably track the indices they target. It is a conservative version of active management with sturdy guardrails. The “active” part here is the asset allocation – particularly which global markets make up the fund. Unfortunately there is a heavy UK bias which compromises diversification (more on this further down.)
Accumulation vs Income Funds
Each version of the LifeStrategy range comes with two options. The difference between an accumulation and an income fund boils down to their treatment of dividends and bond income. Accumulation funds reinvest the income and dividends in the fund on your behalf, whilst income funds distribute the income to you as cash.
A “Core” for your “Satellites” to Orbit
All-in-one funds aren’t just for one-fund heroes. The “core” of the core and satellite investment approach forms a reliable and relatively predictable anchor that protects the bulk of your wealth through extreme global diversification and market-matching returns. A Vanguard LifeStrategy fund that matches your risk appetite is maybe the simplest way to achieve this.
The “satellites” – the more focused bets on particular industries or themes that align with your values – can scratch the itch you have for being more hands-on with your investing. You can satisfy whatever crazy idea you saw on Reddit, safe in the knowledge that your “core” will still be there when your horse breaks its leg on the back straight.
(LifeStrategy funds are tilted heavily towards UK shares, meaning they don’t offer the diversification of a global equity ETF. See the section on home bias further down this review.)
LifeStrategy’s UK home bias
Having said that, one concern with these funds is their heavy exposure to UK stocks. As you can see above, the LifeStrategy 100 fund commits almost 25% of your money to UK shares. Compare that to a global equity ETF which allocates about 4%, in line with the relative size of the UK market globally.
Home bias is a preference to invest in your local stock market. Nearly half of UK investors have more than 50% of their portfolio in UK stocks. And it’s not just the DIY crowd – “More than eight in ten (82 per cent) of advised investors had 25 per cent or more in the UK, while more than half (56 per cent) had at least 50 per cent.”
It’s a great example of how cognitive biases can impair even a robust understanding of principles like diversification. So why does Vanguard persist with such a high percentage of UK shares? I suspect it’s merely a case of giving investors what they want rather than what they need.
Conclusion
Vanguard’s LifeStrategy range represents a streamlined and user-friendly approach to long-term investment. These all-in-one funds can simplify portfolio management for investors of varying risk appetites, providing a potential solution for those seeking to automate this aspect of their lives. With varying percentages of equity, from 20% to 100%, there’s a LifeStrategy product for everyone, from the risk-averse to the more adventurous.
However, investors should bear in mind the heavy UK bias within these funds. While this may appeal to home investors, it does detract from global diversification and could potentially expose investors to unnecessary risk, given that the UK market represents a smaller fraction of the global market. The 0.22% ongoing fee is reasonable, albeit slightly higher than some ETF options, and the funds’ active management strategy is largely conservative, limiting the risk associated with human decision-making.
Overall, Vanguard’s LifeStrategy funds offer an easy, hands-off investment approach with the potential for solid returns, depending on an individual’s risk tolerance. However, careful consideration is warranted in light of the UK home bias and comparison with other available investment vehicles.
