Monday, 16 May 2016
Vanguard LifeStrategy60 - Year 1 Update
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)
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
2016 2.58% (4m to end April)
Corresponding returns for the FTSE All Share Index
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%.
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.