Monday, 16 May 2016

Vanguard LifeStrategy60 - Year 1 Update

Last June I published my latest book ‘DIY Simple Investing’. My research suggested many ordinary people struggle to get to grips with personal finance - thinking about ISAs, pensions and investing are for many possibly about as much fun as a visit to the dentist.

I have come around to thinking that, for the vast majority of would-be investors, all they really need is a very simple, no-frills low cost diy strategy which makes sense, which can be tailored to fit in with a variety of attitudes to risk/market volatility and has every chance of providing a decent outcome.

Furthermore, the rule changes on commissions for advisers from 2014 means Joe Public has to pay upfront fees for professional advice and possibly ongoing annual review fees. Many ordinary people either cannot afford these fees or feel they cannot find a trusted adviser or maybe some can just read a few good books and blogs and armed with good information, can go on to do it for themselves - DIY!

I had the Vanguard LifeStrategy Fund on my watch list as a possible option for my portfolio as far back as 2013 but as I was mainly investing for income and looking for natural yield, I did not quite appreciate its full potential until early in 2015 when I was researching material for my book.

Investing is all about the long term for the best probability of a good result. Investors therefore need a sound strategy which will provide them with every chance of lasting the course or ‘staying in the game’.

Having rejected the LS option for at least the previous two years because the yield was too low, I then decided to look at total return. The stats looked OK and I decided to adopt the strategy of taking the ‘income’ I needed from selling units in the fund rather than taking the natural yield which I have done with my shares and investment trusts.

A year back, I decided to bring the fund on board for my own portfolio and, at the same time, decided it would be an ideal solution to illustrate a very simple diy strategy for my book.

A One-Stop Solution

The Vanguard LifeStrategy funds offer a balanced portfolio of globally diversified equities combined with some gilts and corporate bonds.

They were introduced in June 2011 and provide investors with a neat solution to match their asset allocation between equities and bonds -  from 20 to 100. The number represents the level of equities held in each fund, therefore the LS40 will have 40% equities and 60% bonds; the LS80 will have 80% equities and 20% bonds.

The single funds LS20, 40, 60 & 80 will hold a blend of around 17 or so of the Vanguard stand-alone equity and bond funds. Each of these will hold many hundreds of individual stocks or bonds - for example, just 1 of the 17 constituents is the FTSE Developed World (ex UK) fund which alone holds ~2,000 stocks & shares.

Therefore, by holding just a single LifeStrategy fund, your portfolio is widely diverse with over 20,000 stocks/bonds from all around the world. The bond element (assuming you do not want the 100% equity) will comprise a combination of UK gilts, global bonds, corporate bonds and inflation-linked gilts. The equities element includes their UK all share tracker, global funds and some exposure to emerging markets.

The LS 100 fund obviously holds no bonds and is made up of 10 of the underlying equity funds & ETFs.

The big advantage for me is the auto rebalance to ensure the fund always remains at the risk level selected at the start - in my case with VLS60, 60% equities. I understand the fund is frequently rebalanced - possibly daily. The bonus from this has been estimated at up to 0.5% p.a. which would more than cover the ongoing charges and platform costs.

I had a look at annualised returns for each fund from inception to end April (just short of 5 yrs):

LS20   6.2% p.a.

LS40   6.9% p.a.

LS60   7.46% p.a.

LS80   7.9% p.a.

LS100  8.25% p.a.


Vanguard LifeStrategy 60 Mix

The VLS60 offers the mix I need at present. Just looking under the bonnet of the fund -

60% equity comprised of Developed World (ex UK) 19.1%, FTSE UK All Share 15.0%, US Equity 13.9%, Emerging Markets 4.1%, Europe (ex UK) 4.1%, Japan 2.3% and Pacific (ex Japan) 1.1%

40% bonds comprised of Global 19.3%, UK Gilts 6.3%, UK Corp. Bonds 3.6%, UK Inflation-linked Gilts 3.2%, Others 8.0%

The ongoing charges are just 0.24% p.a.(the 0.10% dilution levy was dropped last year)

Performance

So, how has the fund performed? I made my initial purchase in my new ISA with Halifax Share Dealing in May 2015 and topped up later in the year as the markets retreated. My average purchase price was £136.50.

The current price one year on is £142.15 so a gain of 4.1%.

By comparison, the total return for the FTSE All Share over the past year is -7.2% so the combination of 40% bonds and a wider exposure to global equities in the VLS fund has worked very well.

The total return for the LS60 for each of the last 4 full years has been

2012   9.29%,
2013 11.13%
2014   9.36%.
2015   2.53%
2016   2.58% (4m to end April)

Corresponding returns for the FTSE All Share Index

2012  12.3%
2013  20.8%
2014    1.2%
2015    1.0%
2016    0.6% (4m to end April)

The returns for my own portfolio are 2012 15.5%, 2013 13.3%, 2014 5.4% and 2015 2.7% and year to-date is ~3.2%.

Income

The natural yield on the fund is ~1.4% however I really need an income from my investments of around 4%. I have purchased the accumulation version of the fund with the intention of selling off some units each year to provide the 'income' I require.

As can be seen above, selling off 4% would work in 3 out of 4 years. For periods when returns are negative, I hold a cash buffer of 10% of the fund value in my building society a/c however I am pleased that in my first year of trying out this new approach, my requirements for income are just about covered by the fund growth of 4.0% therefore the cash buffer (+ interest for the year) can remain untouched.

The appeal of the VLS strategy is its simplicity combined with good performance compared to other strategies. It seems to me that putting together a DIY investment portfolio does not come much simpler than this. You decide on your asset allocation, select your broker, invest your lump sum and/or set up your automated monthly direct debit - job done, get on with your life!

The only minor reservation I have is the equity allocation of 25% to the UK is a little high and I would prefer a lower figure of say 15%. Otherwise I am more than happy with returns for my first year and will be topping up my ISA holding in the next few weeks.

Leave a comment below if you hold VLS or have any thoughts generally.

12 comments:

  1. Very tempted myself assuming you/I can achieve a 0% platform charge. Which I understand you can do by dealing direct. (£100k min though!)

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    Replies
    1. Yes, you could invest directly via Vanguard but just be aware it is £100K min. PER FUND and also they do not offer an ISA or SIPP wrapper.

      The platform cost with my broker Halifax is just £12.50 p.a. and on that sum would work out at just 0.012% p.a for as many funds as I want in a tax-free ISA so I can't see much point in going direct.

      Delete
    2. The thing with the Halifax, though, is that every mortal transaction will cost you £12.50. So your costs are likely to be far higher than indicated.

      Cheers

      Delete
    3. Yes, it would not be economical to be trading in and out on a regular basis.

      My 2 lump sum purchases last year cost £25. I will probably do the same again this coming year, so a total of £50. The max. funding for ISAs would be £30,480 so the dealing fees work out at 0.16% over the 2 years. In addition there will be 2x platform fees of £25 - a further 0.08% - therefor total costs of 0.12% p.a.

      Holding the same fund with AJ Bell over the 2 yrs would cost £19.80 in dealing fees and £61 in platform costs at 0.2%.

      With Hargreaves there would be no dealing fees but the platform costs at 0.45% would be £137.

      Obviously each investor needs to work out the most economical broker to fit their investing strategy (see previous post!).

      Delete
  2. You could try Interactive Investor - their set fees are lower than percentage fees and they have a monthly regular investment option to buy for £1.50. I can't remember how much a sale is as I have never sold anything as yet, but it should be easy enough to find out

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    Replies
    1. I think the ii platform fees would be £80 p.a so even with the 'free' trades included the fees would be £160 over the 2 yrs or 0.52%.

      Delete
  3. I am currently waiting for the right moment to buy LS80acc having cash in my Sipp. Seeing as the current price is around 144p and last autumn was close to 130p. Does anybody have any view on my timing strategy, which I am aware is short term focused, while my investment window for LS is 15 years plus?

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    Replies
    1. JB,

      I find it almost impossible to time the market or work out the basic direction from one month to the next but good luck in finding a level with which you feel comfortable to purchase (btw the price is £144 not pence!)

      Delete
  4. The Halifax transaction costs can be reduced by using the regular investment option that costs £2 per trade. I use this option myself and it is very flexible. There is no requirement to make a purchase every month as there is the option to suspend the regular investment.

    For example, I made a purchase in February this year using the regular investing feature. One of the options I was presented with when setting it up was whether I wanted a recurring purchase on the same date each month or a one off purchase only. I chose the latter and was then presented with 4 dates for that month when the purchase would be made. The order went through without any problems.

    I have built up another lump sum to invest. It was then just a case of amending the regular investment plan with the new amount to be invested and which date in May I would like the purchase to take place.

    Sadly, the £2 option only applies to purchases - I believe to sell it is the full £12.50 fee that applies.

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    Replies
    1. Gareth,

      Thanks for clarifying - I was not aware the regular investing facility could be used for a one-off transaction. I may well look at this option for my next purchase.

      Delete
  5. You're welcome. I must admit I was pleasantly surprised myself when I stumbled across this! I've just checked my Halifax account and the transaction has gone through with the £2 commission deducted.

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  6. I have a question about Lifestrategy 60% in a UK taxable account. I have read many times that mixed allocation funds are less tax efficient in a taxable account because of the bond allocation, but I don't really understand this. This is because the yield on the Lifestrategy 60% fund is wholly paid in dividends. This means that the bond portion is treated as equities as far as yield is concerned. Now, with a £5000 dividend allowance tax-free and basic rate tax of 7.5% on anything over £5000 yield this seems to me to be a tax win. You are getting a 40% bond yield paid out as dividends. How can this not be a bonus?

    If I have missed something important here please tell me what it is. I don't claim to be very knowledgeable about this subject, but as someone who would love to pour all my investments into a lifestrategy 60% fund, in both ISA and taxed account, but who reads again and again about it being less tax efficient in a taxable account, I am genuinely puzzled. And I can't find anyone commenting on this point anywhere on the web.

    Opinions and enlightenment on this point would very welcome.

    ReplyDelete