Vanguard LifeStrategy Equity Funds: April 2023 Fund Update

• Vanguard is a pioneer of passive investing

• Exposure to a range of countries and markets around the world
• Good diversification across company shares, corporate and government bonds
• These funds are not on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Vanguard LifeStrategy funds invest in a range of markets across the globe, providing exposure to thousands of company shares as well as corporate and government bonds. They achieve this by investing in a number of individual passive funds, which each track the performance of a particular market.

Each LifeStrategy Equity fund does what it says on the tin, investing a certain amount in shares and bonds. For example, 80% of the LifeStrategy 80% Equity Fund invests in global shares and the remaining 20% in global bonds. There are five LifeStrategy funds, ranging from 20% shares up to 100%. The LifeStrategy 100% Equity Fund is the only one with no bond investments. A higher allocation in shares will increase risk, as they’re subject to more extreme price movements.

The funds could be used as a starting point for diversified passive exposure to global markets.

These funds don’t feature on the Wealth Shortlist as we currently have higher conviction in the multi-asset funds listed and believe there are alternatives for passive global investment.

Manager

Vanguard is a pioneer when it comes to passive investing, having created the first retail index fund over 45 years ago. It now runs some of the largest index funds in the world. Given its size, it has a large investment team with the expertise and resources to help its funds track indices and markets as closely as possible, while having scale to keep costs down.

The LifeStrategy funds are run by a team based around the globe meaning it can provide 24-hour portfolio management for each fund. An internal committee, chaired by Vanguard’s global Chief Investment Officer, reviews the funds’ allocation to different markets annually, and meet four times a year to discuss any trends, issues or concerns.

Vanguard also has a trading analytics team, which is responsible for ensuring the funds buy and sell investments efficiently and at a competitive cost. This involves analysing data from different brokers and banks. Lower costs should help the underlying funds track their benchmarks as closely as possible.

Process

Each LifeStrategy fund is made up of a number of underlying passive funds and the allocation of those is determined by the internal investment committee. The Equity Investment Group at Vanguard then trades the underlying funds to keep them within those allocations.

The LifeStrategy range implements a home bias, meaning there’s an uplift in the weight of the home region within the portfolio. Within the shares part of the funds, 25% is invested in the UK, and 75% overseas. Within the bond portion, the team aims for 35% in the UK, with the remaining 65% overseas.

The funds also invest into emerging markets. These companies have greater potential for growth over the long term but can increase the risk of the funds.

Global bonds’ price movements and income can fluctuate alongside foreign currency movements, adding an extra layer of risk for UK investors. To tackle this issue, the team uses hedging to convert these bonds back to sterling. This involves using derivatives to offset some of the volatility of currency price movements, which can add risk when used. The process allows the bond portion of the funds some stability during more turbulent markets.

The share portion of the funds are not hedged, as shares generally provide higher long-term returns than bonds, making currency effects a less significant influence.

Vanguard also lends some of its investments in the underlying funds to other providers in return for a fee. This could increase returns and reduce costs, though this adds risk.

Culture

Vanguard is currently the second largest asset manager in the world and runs just over $7.2trn of assets globally as of December 2022. The group aims to put the client at the forefront of everything it does, which drives its focus on quality, low-cost index products.

Jack Bogle founded Vanguard in 1975 and it’s owned by investors. This allows Vanguard to redirect its profits back to investors in the form of lower fees, instead of paying dividends to external shareholders. Bogle believed in creating products that simply track the performance of a market rather than taking a shot at picking individual stocks which may beat them.

The team running this fund works closely with other equity research, fixed income research and risk departments across the business. They have daily and weekly meetings to discuss ongoing strategy which could add good support and challenge on how to run the funds effectively.

ESG Integration

Vanguard is predominantly a passive fund house. While it has offered exclusions-based passive funds for many years, it has lagged peers in offering passive funds that explicitly integrate Environmental, Social and Governance (ESG) criteria by tracking indices that tilt towards companies with positive ESG characteristics, and away from those that don’t.

Vanguard’s Investment Stewardship team, which consists of over 60 people, carries out most of the firm’s voting and engagement activity. Their stewardship activity is grounded in the firm’s four principles of good governance: board composition and effectiveness, oversight of strategy and risk, executive compensation and shareholder rights. The Stewardship team also produces frequent insights on their engagement activity at both a corporate and governmental level.

Vanguard has recently left the Net Zero Asset Management initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. We view this as a disappointing backward step, but we’re encouraged that the company will continue to engage with companies on climate-related issues.

The LifeStrategy fund range does not specifically integrate ESG considerations into its investment process, and the funds have the flexibility to invest in sin stocks, such as tobacco and alcohol producers.

Cost

All the funds within the LifeStrategy range have an ongoing annual fund charge of 0.22%. We believe this is reasonable when compared to other multi-asset funds in the market. Our platform charge of up to 0.45% per annum also applies.

Performance

The Vanguard LifeStrategy funds don’t have an official benchmark that they aim to track or outperform. Their goal is to maintain the various splits between shares and bonds within each strategy and ensure those are kept to tightly.

Given Vanguard’s size, experience and expertise running index tracker funds, we expect the funds to keep to their various share allocations closely over the long term.

Over the last ten years, the funds with the most investments in shares have performed best as global stock markets have performed strongly over this time. The funds with more in bonds may have not grown as much, but they have served their purpose of reducing volatility and falling less when markets have been rocky. We wouldn’t expect the funds with more invested in shares to hold up so well when markets fall. Remember, past performance is not a guide to future returns.

Past performance is not a guide to the future. *Source: Lipper IM 31/03/2023.

More about the Vanguard LifeStrategy 20% Equity Fund including charges

Vanguard LifeStrategy 20% Equity Fund Key Investor Information

More about the Vanguard LifeStrategy 40% Equity Fund including charges

Vanguard LifeStrategy 40% Equity Fund Key Investor Information

More about the Vanguard LifeStrategy 60% Equity Fund including charges

Vanguard LifeStrategy 60% Equity Fund Key Investor Information

More about the Vanguard LifeStrategy 80% Equity Fund including charges

Vanguard LifeStrategy 80% Equity Fund Key Investor Information

More about the Vanguard LifeStrategy 100% Equity Fund including charges

Vanguard LifeStrategy 100% Equity Fund Key Investor Information