Monday 18 May 2015

Vanguard LifeStrategy - New Portfolio Purchase

Over recent weeks I have been in the process of reviewing my investment strategy - I am getting to the point where the review is more or less completed and all that remains is to implement some of the changes.

Readers of some recent posts will not be surprised to learn that the Vanguard LifeStrategy has now been added to my portfolio. It will be a couple more days before I get the confirmation but I think the price will be around £140.

I have been aware of these funds for some years and placed them on my watch list as a potential purchase in 2013. However, I had not really considered them as suitable  for my income portfolio as the yields on the respective funds were all too low ~ 1.5% or so. Fortunately, I was reminded by Passive Investor in a comment to an earlier article, that natural yield was not the only way to take income from an investment - it is always an option to sell off some of the capital - say once per year - to achieve the same result.

The other drawback was the extra 0.2% charges I would incur from my broker AJ Bell Youinvest for holding funds - they do not currently charge for holding investment trusts and ETFs.

A One-Stop Solution

The LS 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 required asset allocation mix between equities and bonds -  from 20 to 100. Therefore the LS40 will have 40% equities and 60% bonds; the LS80 will have 80% equities and 20% bonds.

I had a look at annualised returns over the past 4 years :

LS20   7.4% p.a.

LS40   8.4% p.a.

LS60   9.4% p.a.

LS80  10.3% p.a.

LS100 11.0% p.a.

The fund will hold a blended assortment of the Vanguard stand-alone funds. 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 tracker and finally, a small exposure to emerging markets.

As my chosen asset allocation in recent years has been approx. 60% equities and 40% fixed interest, I naturally selected the LS60 for my first purchase.

60% equity comprised of Developed World (ex UK) 19.2%, FTSE UK All Share 14.9%, US Equity 13.8%, Emerging Markets 4.3%, Europe (ex UK) 4.2%, Japan 2.2% and Pacific (ex Japan) 1.2%

40% bonds comprised of Global 19.3%, UK Gilts 5.9%, UK Corp. Bonds 3.7%, UK Inflation-linked Gilts 3.2%, Others 7.9%

The total return for the LS60 for each of the last 3 full years has been

2012   9.29%,
2013 11.13%
2014   9.36%.

The figures for my own portfolio over the same period were 15.5%, 13.3% and 5.4% - slightly better overall but with quite a lot more work, more volatility and probably a little more risk.

The ongoing costs on the LS range have recently been reduced to just 0.24% plus a one-off dilution levy of 0.10%. With the additional platform charges, this makes the combined ongoing charges 0.44% which is the equivalent of some of my lower charging investment trusts. As an aside, I am wondering why Vanguard cannot offer their own lower cost platform as I am sure it would be very popular.

I have purchased the accumulation units and have made a note in my diary to check the additional units and return this time next year. I will then make a decision on what percentage of capital to sell down as ‘income’. I am hoping for something around 4% which should be roughly the equivalent to replacing the dividend yield on my individual shares.

I really do think that putting together a DIY investment portfolio does not come much simpler than this. You decide on your asset allocation, select your low cost broker, set up your automated monthly direct debit - job done, get on with your life! Maybe I should give up on my blog now!!

The new purchase has been funded through the sale of a few more of my individual shares. Centrica and Sainsbury have both recently announced significant cuts to their dividend, also both have seen quite a rise in their respective share price in recent months. The other share to go was Reckitt & Benckiser which has seen an almost doubling of the share price since I purchased some 4.5 yrs previously which I am happy with however this inevitably corresponds to a drop in the yield to below 3% which makes it a little easier to release. I will update my shares portfolio in the near future as there have now been quite a few sales.

In addition to the LS fund, I also took the opportunity to add to my Vanguard All World High Yield ETF(VHYL).

As ever, slow & steady steps.....


  1. Nice choice. Really seeing you ramp up the shift in your portfolio.

    I think the Reckitt Benckiser sale is wise. It is an excellent company but I suspect it will be a fairly heavy victim of share price depreciation once (or should that be if!) interest rates start to rise. If I see it go above a 3% yield though I may be tempted to add it my portfolio. I have been itching to add it for nearly 2 years now!

    Keep up the good work!

    1. Thanks DD - its taken a little while to get to a 'feels right' point but I think I am more or less there so all that remains is to make the necessary adjustments.

      Reckitt are a well run organisation and I am sure they will continue to do well but I thought it was right for me to cash in the chips so to speak and move to another table!

      I hope you do not have to wait too long to purchase!

  2. Poor old Reckitt gets the boot! Well, it has done well and - however you cut and dice it - looks fully priced, so probably a decent time to move it on. I will keep mine and hope that they "grow into" their valuation, rather than fall down to a more sensible one. Vanguard seem to be gobbling up market share over here now, having conquered America. They haven't operated long here have they? Great products and an influential man at their helm.

    1. FI - good to hear from you, thanks for stopping by.

      I know, one of the cornerstones of my individual shares portfolio has left - I think I may book in for a counselling session tomorrow!

      I'm not too sure how long they have been offering products in the UK - maybe 20 years or so? As you say, great products and good prices combined with what feels like a genuine interest in the retail investor - I understand they are mutually owned by their investors. I don't know anything about the man at the top - maybe I should do a little more research.

    2. I was thinking of John Bogle - he must be well into his 80s now, but is one of the pioneers of index investing and has been a long-standing and fairly devastating critic of mutual funds (unit trusts). Have a look online for some interviews with him - he is a persuasive man and one of the main reasons I am so wary of unit trusts.

    3. Ah, I did not think Bogle was still at the helm - assume he had retired many years back - I think he has been going since the 1950s on the wisdom of indexing. I occasionally look in on the Bogleheads site.

  3. One question, are you not doubling-up on the fees? I mean the LS charges 0.24% but you are also paying the fees for each of the underlying funds. So with the platform cost as well, it is probably costing 0.6-0.7%. That is higher than many good ITs that have blend of equities and fixed income in their portfolio. I like the LS concept but the double cost has put me off the product, at least to date.

    1. Good question Chris and the answer is no, you are not doubling up on fees.

      To quote from Vanguard "The ongoing charges figure (OCF) for these funds represent an average of the costs of the underlying funds, plus a small amount to cover the cost of administering the individual LifeStrategy™ Fund you invest in".

      So, if the average charges of all the underlying funds in any LS fund came to,say 0.18% - you are paying an extra 0.06% on top for the convenience of holding them all in one basket PLUS the big advantage of auto rebalancing between equity/bond.

  4. Thanks. That sounds like a good deal, and I will take another look at the LS for my next investment.

  5. John, thanks for the posts (here and on Monevator) about Vanguard - I'd reached a similar conclusion about using them as a good starting point myself - great to have that confirmed by you!

    For various reasons I've decided to invest 100% in equities for now. Does the LS100 offer any advantages over a fund such as IShares core MSCI World ETF?

    Total fees seem to be in the same ballpark but I wonder if I'm missing something or over-simplifying by comparing the two?

    Keep up the good work