Is Vanguard LifeStrategy Still The Best Multi-Asset Fund?

Key Concepts

• Multiasset Funds: Investment funds that hold more than one asset class (e.g., equities, bonds, property, cash).
• Investment Association Sectors: Classification system for multiasset funds based on their allowed equity exposure (Cautious, Balanced, Growth, Flexible, Volatility Managed).
• Diversification: Spreading investments across different asset classes to reduce risk.
• Rebalancing: Adjusting the proportions of assets in a portfolio to maintain a target allocation.
• Drawdowns: The peak-to-trough decline during a specific period for an investment.
• Ongoing Charge Figure (OCF): The annual fee charged by a fund, expressed as a percentage of the investment.
• Compounding Drag: The negative effect of fees on investment returns over time due to compounding.
• Risk-Adjusted Returns: Returns of an investment relative to its risk.
• Home Bias: A tendency for investors to favor domestic assets over foreign ones.
• Strategic Asset Allocation: Long-term target weights for different asset classes.
• Dynamic Asset Allocation/Tactical Tilts: Short-to-medium term adjustments to asset allocation based on market views.
• Open-Ended Investment Companies (OEICs): A type of investment fund that can create or cancel units as investors buy or sell.
• Exchange-Traded Funds (ETFs): Funds that trade on stock exchanges like individual stocks.

Multiasset Funds: A Comprehensive Overview

Multiasset funds are presented as a convenient, diversified investment solution for UK investors, with £145 billion currently invested. However, the quality and cost of these funds vary significantly, ranging from 0.2% to 10 times that amount in fees. This video aims to guide investors on selecting the appropriate multiasset fund based on their risk tolerance, financial goals, and investment platform, while also highlighting surprising data on fees and returns.

What are Multiasset Funds?

Multiasset funds are defined by their holding of more than one asset class, typically including equities, bonds, property, and cash, and sometimes commodities, infrastructure, or alternative assets. The Investment Association classifies these funds into sectors, which provide a clear indication of their allowed equity exposure:

• Cautious Funds: Up to 35% in equities, with a significant portion in investment-grade bonds and cash.
• Balanced Funds: 20% to 60% in equities, aiming for a mix of growth potential and bond stability.
• Growth Funds: 40% to 85% in equities, for investors seeking higher upside with greater volatility.
• Flexible Funds: Managers can allocate anywhere from 0% to 100% to equities.
• Volatility Managed Funds: Adjust asset allocation to maintain price fluctuations within a defined range.

These classifications facilitate like-for-like comparisons and help investors understand the inherent risk. The primary benefits of multiasset funds include:

• Simplicity: Built-in diversification and automatic rebalancing.
• Risk Management: Aim to smooth returns and reduce significant drawdowns, especially in lower-risk categories.
• Professional Oversight: Investors are freed from daily market monitoring.

However, potential downsides exist:

• Limited Upside: Lower-risk versions may not fully capture large market rallies.
• Stacked Fees: Funds of funds can incur multiple layers of charges.
• Manager Skill Dependency: Actively managed funds rely heavily on the manager's expertise across asset classes.
• Lack of Control in Retirement: Investors may not control which assets are sold for income generation, unlike with separate risky and safe fund holdings.

For investors in the accumulation phase, multiasset funds are considered a good starting point for simplicity.

The Impact of Fees on Returns

A reasonable ongoing charge for a multiasset fund is considered to be around 0.3% or less. The current median ongoing charge is disappointingly high at 0.8%, with a significant number of funds charging 1% or more, some even approaching 2%. Funds with fees below 0.3% are less common, with notable examples including Vanguard Life Strategy, HSBC Global Strategy, and Schroeda Multiasset portfolios.

The detrimental effect of fees on long-term returns due to compounding is substantial. The data suggests that the most expensive funds do not consistently outperform. A comparison of the cheapest multiasset funds (fees at or below 0.25%) reveals that competition, particularly from Vanguard Life Strategy, has driven down fees for many large fund managers. Providers like Schroeda, HSBC, and Fidelity now offer low-cost options.

Dispersion in Returns and the Fee-Return Relationship

Over the last decade, there has been a massive dispersion in multiasset fund returns. While fund size (assets under management) is indicated by circle size on a graph, funds with similar risk levels (vertical slices on the graph) can exhibit vastly different returns. For instance, within a risk slice comparable to Vanguard's Life Strategy 60, many funds underperformed Vanguard, with only a few beating it.

A concerning observation is that many funds cluster in low-return territory despite the risk taken. This underscores the necessity of careful fund selection beyond simply purchasing a multiasset fund. The notion that paying higher fees guarantees better returns is challenged by data showing that higher-fee funds often deliver lower risk-adjusted returns, especially at very high fee levels. Vanguard Life Strategy funds, with their low fees and respectable returns, appear as a vertical line on a risk-adjusted return graph due to their consistent fee structure. The surprising conclusion is that higher fees are often associated with worse outcomes, making cost a critical factor in fund selection.

Choosing the Right Multiasset Fund: A Checklist

A structured approach to selecting multiasset funds involves considering several key factors:

1. Risk Level: The Investment Association sectors provide a useful guide. Cautious investors might consider the 0-35% equity band, balanced investors the 20-60% band, and growth-oriented investors the 40-85% band. The IIA flexible sector offers maximum flexibility.
2. Time Horizon: Longer investment horizons allow for greater equity exposure and tolerance for potential losses.
3. Asset Allocation:
   • Geographic Bias: Assess the UK versus global equity weight. Many funds have a UK bias, despite the UK's relatively small share of the global equity market (4%).
   • Bond Allocation: Understand the type and proportion of bonds held.
   • Alternative Assets: Check for investments in property, commodities, or other alternative assets.
   • Fund of Funds: Determine if the fund invests in other funds, which can lead to higher fees.
   • Diversification: Evaluate the genuine diversification of uncorrelated assets versus different types of equities.
4. Fees: Passive funds are generally cheaper and often perform competitively. Vanguard Life Strategy funds, with a 0.22% fee and fixed allocation, are a benchmark. Active funds may offer potential for higher returns but require careful scrutiny.
5. Active Management Considerations (if applicable):
   • Historic Risk-Adjusted Returns: Divide historical returns by fund volatility.
   • Drawdown Analysis: Examine the depth and duration of historical falls from peak values.
   • Manager Tenure: Assess the average manager's time in the fund.
   • Investment Process Stability: Check if the investment strategy is consistent or frequently changed.
   • Performance Across Economic Cycles: Evaluate how the fund has performed in different market conditions.
6. Fair Comparison:
   • Volatility Matching: Compare returns of funds with similar volatility levels.
   • Fund Type: Ensure comparison of accumulation with accumulation and income with income funds.
   • Currency: Use funds with the same currency to avoid distortions.
7. Style and Geographic Biases: Be aware of tilts towards specific regions (e.g., UK, US, emerging markets), sectors (e.g., tech), or asset types (e.g., junk bonds).
8. Managerial Expertise (for active funds): Research the fund managers, their approach, and their track record, acknowledging that managers often move between funds.
9. Platform Compatibility: Ensure the desired funds are available on the chosen investment platform, especially if the platform is ETF-only.

Recommended Multiasset Funds

While personal research is paramount, the following funds are highlighted as strong contenders:

• Vanguard Life Strategy Funds:

  • Strengths: Low fees (0.22%), long history, passive management with fixed equity/bond ratios (20%, 40%, 60%, 80%, 100% equity tiers). Daily rebalancing ensures allocations remain on track.
  • Weaknesses: Significant UK home bias (approx. 25% equity, 35% bond exposure in UK assets), which may have led to underperformance over the last decade.
  • Attribution: "gold standard for multi-asset funds."

• HSBC Global Strategy Funds:

  • Strengths: Comparable fees to Vanguard, no UK bias (pure global market cap approach, typically 1-2% UK equities, 1% UK bonds). Unhedged fixed income allows for potential currency gains when sterling weakens. Active tactical tilts against strategic allocations based on market views.
  • Weaknesses: Active tactical tilts introduce uncertainty about their impact on returns.
  • Classification: Falls under the IIA's volatility managed sector.

• Fidelity Multi-Asset Allocator Funds:

  • Strengths: Slightly cheaper than Vanguard (0.2%), over a decade of history. Explicit allocation to small-cap (6-8%) and global REITs (6-8%). More global fixed income approach (approx. 20% global government bonds, 10%+ global corporate bonds).
  • Weaknesses: Underperformed Life Strategy on a risk-adjusted basis, despite a smaller UK bias.

• Schroeda Global Multi-Asset Portfolios:

  • Strengths: Actively managed with a three-layer process (strategic, dynamic, active stock selection). Targets specific volatility levels (3% to 14%). Fees capped at 0.22% ("active management at passive prices"). Globally diversified with modest UK equity overweight (10-12%) and low UK bond exposure (2-3%).
  • Weaknesses: Newer than Vanguard or Fidelity offerings, requiring more performance history for a definitive judgment.
  • Attribution: "good value for active multi-asset management if you want it."

Vanguard's dominant scale (approximately 100 times larger than Schroeders) is noted.

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Conclusion

Multiasset funds offer a valuable tool for diversification and simplicity. However, careful consideration of risk tolerance, time horizon, asset allocation, and, crucially, fees is essential. The data strongly suggests that lower fees are generally associated with better outcomes, and higher fees do not guarantee superior performance. While Vanguard Life Strategy funds remain a strong benchmark due to their low cost and consistent approach, other options like HSBC, Fidelity, and Schroeders offer compelling alternatives with different strategic tilts and management styles. Ultimately, thorough personal research is key to selecting the multiasset fund that best aligns with individual investment objectives.