24 Feb 2014, 12:53pm
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  • Vanguard Lifestrategy has a lot going for it. Shame you have to buy it all at once

    One of the places the lazy index investor gets pointed to is Vanguard’s Lifestrategy – a sort of all-in index fund that tracks the whole world and rebalances automatically, without all the stress of doing it yourself. Buy regularly every month, sit back and forget for 20 years. I was looking at this for Mrs Ermine’s ISA.

    Trouble is, at the moment 30% of LS is made of highly priced stuff  like the US , that is on exceptionally high valuations at the moment and unpleasantly high by CAPE, and along with another 30% composed of the UK which looks like this

    As Clint would say, do you feel lucky, punk? Well, do you?

    As Clint would say, do you feel lucky, punk? Well, do you? Remember that money was worth more in 2000 so its’ not quite as good as it looks, but one would clearly be buying high

    The UK and the US together  makes up over a two thirds of Lifestrategy so it would be a nasty headwind to buy into now. On the other hand, a portfolio roughly diversified like Lifestrategy is where I’d like to be in about 8 years time. An evil thought comes to mind – what about buying the cheaper parts first 😉 Let’s lift the lid and look at what’s in there.

    Vanguard Lifestrategy isn’t the MSCI World

    I’d always assumed this is a worldwide index from the way people talked about it, but it turns out this is not the case. The US flavour of this is quite different from the UK version – if you take a butcher’s hook at the geographical spread of the latter

    Vanguard UK Lifestrategy 100% Eq geographical allocation

    Vanguard UK Lifestrategy 100% Eq geographical allocation

    There’s a long tail but I’ve caught about 90% of the allocation. And it’s not what I expected, which would be more something like the MSCI world index.

    MSCI World composition

    MSCI World composition

    To be fair, MCSI World is still about 80% developed world at least. The very heavy UK weighting of VGLS100% – presumably comes from the view UK investors will typically show a home bias. As shown in my portfolio – I’m easy with that. I am surprised that the UK is as much as 9% of the MCSI investable universe, whereas the US being more than half doesn’t really surprise me that much. Lifestrategy has the advantage of being a recipe for a diversified portfolio which comes along with a handy benchmark. There are lots of other ways of thinking about diversifying, but taking Lifestrategy to bits is a lazy win.

    Let’s take a look at what it’s made of (straight filched from Trustnet)

    Note: I had the bad luck to post this just as Vanguard made notable changes to Lifestrategy, so the exact values are incorrect. Take a look at the comments for the latest lowdown – thanks for the heads up!

    21.9% VANGUARD US EQUITY INDEX ACC
    21.6% VANGUARD FTSE DEVELOPED WORLD EX UK EQUITY INDEX ACC
    16.7% VANGUARD FTSE UK EQUITY INDEX ACC
    11.6% VANGUARD FTSE DEVELOPED EUROPE EX UK EQUITY INDEX ACC
    11.1% VANGUARD FTSE U.K. ALL SHARE INDEX
    8% VANGUARD EMERGING MARKETS STOCK INDEX ACC GBP
    5.8% VANGUARD JAPAN STOCK INDEX ACC GBP
    3.3% VANGUARD PACIFIC EX JAPAN STOCK INDEX ACC GBP

    Total 100.00%

    Lifestrategy 100 – diversification roughly where I want to be in ~ 8-10 years’ time

    So this is the sort of balanced asset allocation where I want to be in 8-10 year’s time. That’s when I will have stopped contributing to my ISA. Obviously it’s a moving target. The world of 10 years from now may have a larger EM allocation, because, well, some of those markets may have emerged and therefore be that much bigger. I’ve ranked these components into high-level categories and roughly summarised the balance of VGLS from it’s components. There are inconsistencies – Developed world ex UK is polluted with a lot of US. However, since some of my aim is to steer the long term balance towards something like VGLS using some of those Vanguard funds that make up VGLS that data error doesn’t matter so much.

    So where am I now (uk l is UK large, FTSE100 big fish, UK m s is medium small UK shares). FWIW I didn’t design it to be this unbalanced. Some of those big UK fish just grew. They’ll probably shrink in years to come, looking at the current valuations…

    where I am now. I'm skewed somewhat by The Firm that I can only sell off in sub CGT lumps

    where I am now. I’m skewed somewhat by The Firm that I can only sell off in sub CGT lumps, but I’m also skewed by the HYP that also holds UK big fish

    It’s easy enough to add up ten years worth of ISA savings and estimate what the target value is (added to what I have already, which will be the foundation).

    Where do I want to be (this is my estimate of Lifestrategy’s composition)

    an esitmate of the current Vanguard Lifestrategy allocations

    an estimate of the current Vanguard Lifestrategy allocations

    And the standard index investing mantra is go like a good little indexer and buy VGLS100A every month, and hold. But I haven’t got where I’m now by indexing, I’ve got there by buying what people hated. Two thirds of the composition of VGLS100 it is on or near all-time highs! Not only that, I’d have to sell off my HYP. I don’t want to buy high, I want to buy low. At the moment, f’rinstance, that EM index is a lot cheaper than the US index fund

    EM versus US index fund prices

    EM versus US index fund prices

    Kinda makes sense to go buy that wodge of EM first, since it appears to be on sale at the moment, whereas buying the US index at the moment seems to be like going to Harrods? I’m going to aim for what’s cheap – well, to about 3/4 of the ISA allocation. And I’ll dial back on buying the VUSEIDA for the moment – sometime in the coming years there’ll be a market swoon in the US, and that will be the time to go for that. That will probably be at the same time as a general developed world market rout. So loading up on EM isn’t a bad, and the Pacific ex Japan VAPEJPA:ID has also shown lacklustre performance of late. I don’t currently have anything in that space, either

    Strategic Diversification over several years – buy what people hate 🙂

    It’s often said that the FTSE100 gets most of its earnings from abroad, so it is more geographically diversified than non-UK indices 1 which I’ve relied upon to feel easier about such a shockingly heavy home bias. I also don’t suffer the sectoral swings I’d take from the FTSE100’s varying composition because I choose the HYP shares, and I have tried to sector diversify these

    The aim is to end up with roughly the same asset allocation as Lifestrategy once I’ve reached steady state – I will have enough income to live on but not enough to invest fully into the ISA after I’ve shifted my pension AVC fund into it over quite a few years. To actually achieve Lifestrategy’s asset allocation I’d have to sell off some of my HYP. I’m not going to do that, so I will always be more UK-heavy than Lifestrategy. But I will try and build a more balanced  Lifestrategy-like portfolio, buying the assets I don’t currently have when they are cheap. I am lucky in that I bought the current UK stuff when it was cheap, I wouldn’t want to try and do that right now. Taking a look at the performance of the individual  components that make up VGLS

    The Lifestrategy constituents.

    The Lifestrategy constituents.

    In this comparison it’s clear that you can buy VIEMKT 2 for the same price as a couple of years ago. Now obviously it may still tank, but reversion to the mean indicates it’s less likely to do that than something that has been riding high. If I want to own a certain amount of this in a few years time I may as well buy it when it is on sale 🙂 The Japan fund also looks a bit sick, I guess Abenomics isn’t quite as good as the FT makes out here. If there’s ever an asset that deeply scares me, it’s anything to do with Japan, it’s been in a permanent tailspin throughout my working life. It’s the investing equivalent of Montgomery’s

    Rule 1, on page 1 of the book of war, is: “Do not march on Moscow”. Various people have tried it, […] and it is no good. That is the first rule.

    Field Marshal Bernard Law Montgomery

    And correspondingly, throughout my working life, you could say

    Rule 1, on page 1 of the book of investing, is: “Never invest in Japan”. Fortunes have been lost in the quicksands there

    Fortunately the calculated Lifestrategy weighted equivalent of what I want on this index isn’t too bad. If I can find a way to drip-feed that I can live with the expected loss. I don’t expect this to do other than go down the pan, but that’s one of the conundrums of diversification and trying to buy low. You have to buy stuff that looks bad at times, just like those income trusts did in 2009/10. Even stuff that looks bad and has always looked bad for my economically active lifetime – I suspect Japan is diworsification.

    Nothing shows you quite like this the opportunities you might get to buy things when they’re on sale if you take a few years about it.

    Callan's Periodic Table of Investment returns - see how EM has gone from hero to zero to hero to zero

    Callan’s Periodic Table of Investment returns – see how EM has gone from hero (2009,2010) to zero (2011) to hero (2012) to zero (2013). This is US biased, but 2013 was the year of the developed world

    Now the thesis of Lifestrategy indexing is you buy a vertical slice, weighted appropriately. Repeatedly, over many years. I want to buy a horizontal slice over about 8 years. From the lower half of the Table 🙂 If you look at Lifestrategy, a good two-thirds of the weighting in US and UK, throw in dev xuk and you’re running at three-quarters developed world. All that is riding high at the moment. So if you buy Lifestrategy now you’re buying a lot of stuff that’s at high CAPE valuations. I don’t need to do that.

    That high valuation doesn’t matter terribly much if it’s one year out of 40 – you’re only buying 1/40th of your total capital savings at a high valuation. One of the other years could have been 2008, when everything was down the toilet, and you’d have got a great deal 😉 The next time within the next 10 years when the developed world is in the pits again you’ll get good value too. Indexing is great if you invest the money as you earn it, over decades. Which most people do.

    But I’ve only got another eight years of contributory investment life ahead of me, because I have absolutely no human capital left, so I am not generating income myself and investing that. I don’t want to  buy Lifestrategy now, because it means buying 60-75% of dear assets and highly correlated with what I have already. It isn’t right for me, and general index investing isn’t right for me either because of my short contributory time horizon and existing asset spread. However, selective indexing I haven’t got an objection to, I’m not going to go stock-picking in non UK markets. VGLS100 is a pretty good model of a diversified portfolio with free benchmark. I just don’t want to buy all the bits at the same time.

    I don’t buy the US at the moment because I focused on winning income from a UK HYP. As a comparison of the Vanguard US and UK components shows there is notable correlation between the two, at least over the last five years.

    Vanguard US and UK, rebased to GBP

    Vanguard US and UK, rebased to GBP

    I’m not going to buy the UK index either (because my HYP is plenty enough) and it looks like my UK bias has been standing acceptable proxy for the US market because of this dev world correlation. It’s a pleasant surprise – remember the dark days of 2009 when the developed world economy had been destroyed and emerging markets were going to charge over the parapet and eat all our lunch 3? The trouble is that people tend to overestimate what will happen in the short term and underestimate what will happen in the long term. Popularised by Bill Gates

    We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.

    It made him rich, though I do recall the Internet caught Bill napping. Anyway, I suspect the developed world’s lunch is still being coveted. And I wouldn’t like to be lulled into inaction, and kick myself five, ten years off for having failed to buy some EM exposure when it was going for a song. Obviously if I’d started in July 2009 then I’d have got it 40% cheaper

    40% cheaper in 2009...

    VFEM still 40% cheaper in 2009, though we had over 10% inflation since then

    I’m not going to buy it all in one go, but I will  spread myself out across the year. VFEM is an ETF in this space, and TEMIT seems to be on a 6% discount at the moment. Emerging markets seem to have a history of currency crises and market train wrecks, though that’s kinda rich given the near-death experience the First World went through recently.

    I favour actively passive. Not passively active 😉

    Notes:

    1. according to that study revenues for the French CAC and German DAX are similarly overseas-derived
    2. or some equivalent, like the ETF VFEM. I can’t see VIEMKT on TD Direct, though their Vanguard fund choice is weak. Interactive Investor seems to offer it for sale
    3. I’m not asserting second sight here; I felt that way too!

    Ermine, I am not as smart as you but have come to some of the same conclusions. I was mostly all in on Lifestrategy 100% equity until the middle of last year. I have moved 25% into ftse 250, Europe Ex UK 25% and 20% into ftse 100.

    I am now looking at the results of my good fortune and want to go into EM. Ftse 100% is looking rich. Being too tight to pay vanguard dilution levys is the only thing holding me back

    I’m currently using LS 100%, and agree US overvalued, but UK roughly fair value IMO. Still haven’t my mind up on tactical allocations. GDP is riding high so international diversification now makes more sense. Europe and EM seem reasonable places to look.

    Perhaps something like RIT’s strategy is the right idea – allow tactical adjustments, but enforce a maximum percentage deviation from long term target. Since my portfolio’s pretty small, a few percentage points difference doesn’t seem worth the faff. I’ll stick with LS 100% knowing full well short term will be bumpy – but auto-rebalancing will help sort me out long term 🙂

    Incidentally, in your LS breakdown, it includes Vanguard Dev World ex UK, but then each of the separate market trackers (US, Pacific ex Japan, Japan, Dev Europe ex UK) are held as well. Why bother? It adds a tiny bit of Canada (0.89%) but not much else. And has a higher OCF than the separates’ weighted average. Am I missing something?

    * GDP should’ve been GBP in above post, sorry (as in the pound is currently strong).

    If you don’t like the VLS weightings or stamp duty levy, try the L&G Multi-Index range – it’s pretty competitive (and available on TD).

    http://www.landginvestments.com/funds/multi-index/

    (You need to pretend to be an investment pro. Take a look at the fact sheet of whatever takes your fancy.

    In fact, perhaps the Multi-index 7 fund is exactly what you want, with its dynamic allocations currently underweight the UK (33%), US (16%) and Japan (6%), and overweight Pacific (9%), EM (16%) (and a little overweight UK property (6%) and Europe (11%))!

    https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Documents.aspx?type=custom_field.www_landg_co_uk.factsheet_UTInt&user=flweb&sedol=B9LF0M8

    Easy! 😀

    25 Feb 2014, 9:10am
    by grey gym sock

    reply

    if you’re going to keep your individual UK shares, then you probably don’t want to buy lifestrategy at all, or you’d be repeating the UK allocation. though you can certainly use lifestrategy 100% as a benchmark.

    there is Vanguard FTSE Developed World ex UK Equity, if you don’t mind the 58% USA weighting, or separate regional funds, as you say. i’m a bit cautious about US valuations, but they may be at the start of a decent economic boom. underweighting the US seems fair enough, but i wouldn’t like to leave it out.

    plus emerging, if you want it. i’m mostly sceptical (that investors will get higher returns by investing in faster-growing economies). and feel that the risk (not the same as volatility) is often higher. but if you do want some, it seems a fair time to buy in.

    The weightings of Vanguard Life Strategy have changed recently, the home bias is significantly lower and is now around 25%.

    @Paul – I was flying this one to find out what was wrong with it, I don’t calim to be smart 😉 However, there seems to be something in it…

    @Rob – Although I got the proportions from Trustnet, the Vanguard PDF agrees – but Colin’s note indicates this may be changing. Agreed for someone with a longer accumulation phase a lot of this will come out in the wash, though the, ahem, market-timer in me can’t help wondering what leaning against the higher-valued stuff year on year would do 😉 It may be that rebalancing does this after the fact anyway, it would be an interesting simulation.

    @Greg thanks for that – the Multi-7 fund does look very close to what I want, and the OCF is about right. The balance of the weightings lacks transparency in a pretty big way, so it wants reviewing regularly. I do like it for Mrs Ermine’s ISA because Charles Stanley don’t let you buy less than one unit of a fund so there isn’t the resolution for individual fund purchases.

    @GGS – I like the thinking – indeed that Van Dev World x UK was was already pressed into service last year to lean against my enormous home bias, and together with some continental europe are the only things forcing open red the ex-UK dev part of the pie. Interesting that you feel the US is at the start of a boom, there are some macro things in its favour I guess (energy, and the sheer fact of it being the US!)

    @Colin – interesting – this hasn’t shown on their PDF yet. But it would be a logical result of the high UK valuations – and rebalancing seen in action!

    @all thanks for some interesting alternative viewpoints and ideas all round on this one – it’s much appreciated!

    The movement in weightings aren’t due to rebalancing, they are part of an overall set of changes to the LS range.

    The annual charge has dropped for most of them as has the dilution levy, the asset allocation has changed, and they’ve gone from a nurs to a ucits structure.

    28 Feb 2014, 1:04pm
    by MrBeethoven

    reply

    Hello Ermine,

    Love your website! I’ve been reading/lurking for the last 2 or 3 months since I found it via (the also wonderful) Monevator.

    As per the post I made to Monevator this morning (copied below) I want to add some new money to the market and had been thinking of Vanguard LifeStrategy100 plus a bit into emerging markets. Your interesting Vanguard blog the other day set me thinking, hence the post copied below.

    What do you think of this idea? It kills two birds with one stone for me as it spreads the money out a bit more than VLS100 and provides a bit of fun on the side whilst remaining passive.

    My Monevator post starts here…

    I want to put another £8k (lump sum) into the market but I’m already heavily overweight in UK All Share Trackers and nervous about the current lofty heights of the US. I already make much use of Vanguard trackers. I also intend to drip feed some additional money into emerging markets over the next year or so as they appear to be out of favour.

    One option for my £8k lump sum that I have been considering was Vanguard LifeStrategy 80 or 100. However, the high weighting of US and large UK puts me off so I thought about making up my own fund of funds by putting equal amounts of £1k into each of 8 different cheap trackers.

    The ones I’m thinking of are listed below. I will probably use ACC versions of HSBC funds where available. Given the low amounts I am very unlikely to re-balance this portfolio within a portfolio, at least for 2 or 3 years, so it will be interesting to watch how each market’s performance compares to the others and also to my other holdings including LifeStrategy 80 which I already hold.

    UK FT100
    UK FT250
    US
    Europe ex UK
    Japan
    Pacific exJapan
    Emerging Markets (L&G or Blackrock depending on charges)
    Gilts (HSBC)

    What do others think of this?

    @MrBeethoven – first, it’s worth bearing in mind that both Colin and AJ highlight that the weightings I used for VGLS100 appear to be wrong, but I can’t yet track down what the correct ones are. You’d need to nail that down before proceeding.

    I think you may be working a little bit hard for your diversification. If you imagine VGLS as (A+B+C+D+E+F+G+H) where ABCDEFGH are the components in the order and weight I listed them, and you’d like to double up the amount of EM weighting, then for every £100 buy £92 of VGLS100 and £8 of EM. It’s not exact but close enough for the original 8% EM weighting part which is now upped to almost-but-not-quite 16%

    I can’t factor out the UK part of VGLS because I already own a load of UK exposure. I’d need a Lifestrategy ex-UK fund, or start assembling it out of bits. Or find something that looks a bit like that. Greg’s L&G 7 is less biased towards the US and UK, and is reasonably low priced, but needs to be watched yearly as the weighting criteria aren’t transparent.

    You also need to take into account the total current spread of your asset allocation at its current market value to determine policy shifts.

    Certainly if you allocate an equal amount (£1k) to each of the parts of the components of VGLS you will massively overweight the smaller components compared to VGLS, and underweight the US and UK. Only you can determine if that’s what you actually want to do!

    There is a case for keeping it simple and you should make sure you have an answer that you are comfortable with as to why you feel that can be improved 😉

    28 Feb 2014, 3:26pm
    by MrBeethoven

    reply

    Thanks for the response ermine. I did find different weightings to yours for VGLS100, on HL I think, but it was still circa 30% each for UK and US.

    I take your point about keeping it simple, and by coincidence I had already read that Monevator article earlier today.

    The more I think about it the more I think my proposal is because I want to do something more interesting with this £8k (which will only be about 5% of my total invested money) than just plonk it into the nearest tracker and forget about it (perhaps I have too much time on my hands now I’ve retired early in my 50s!). On the other hand, I don’t want it going into active funds as I already have too much in those and I definitely don’t want individual shares.

    As you say, this would massively overweight the smaller components of VGLS100 but only within the £8k pot, overall they would all still be massively underweighted so I would be comfortable with the 8 * £1k approach.

    I think I would like a VGLS that excluded both UK (because I have too much, apart from FT250) and US (I don’t have enough but I’m worried about how high it is right now) but in the absence of such a thing I thought I would try and invent something but without weighting it in line with stock market sizes.

    I could leave UK FT100 and US out but for the sake of only £1k each I thought it would be more interesting to include them if only for comparison purposes. Although this is not as simple as a single tracker, it’s mainly so at the point of buying. After that I’ll just update prices in Quicken once a year and won’t bother to rebalance unless/until I decide to add significantly larger amounts of money on the same basis in the future.

    Thanks for your input and keep up the good work, I look forward to your musings every week.

    1 Mar 2014, 6:32pm
    by Adrian Steele

    reply

    I haven’t read through every comment on the thread so someone may have made this point.

    Vanguard have just (February 2014) quite radically changed the allocation in Lifestrategy. Main changes are lower UK allocation, higher US allocation, lower allocation to gilts and index linked gilts and introduction of international bonds hedged to sterling. There public line is that it is about keeping costs down.

    Having been in Vanguard Lifestrategy since the beginning I am very unhappy about the new higher weighting to US stocks just after a fantastic bull run. I guess over the long run it doesn’t really matter but all the same…

    @Adrian do you have a reference with full into on the recent LifeStrategy changes? Looking on the Vanguard website, their factsheets still seem to be dated 31st Jan and detail the old allocations.

    @Charlie – the allocations at 31st Jan are the new ones. See here for VGLS100:

    https://www.vanguard.co.uk/adviser/adv/loadPDF?docId=2043

    U.K. Equities 27.8%
    European ex-U.K. Equities 16.0%
    North American Equities 35.3%
    Japan Equities 8.0%
    Asia ex-Japan Equities 5.0%
    Emerging Markets Equities 8.0%
    Total 100%

    I am concerned about the initial and ongoing charges of investing.

    What is the cheapest way of buying into the Vanguard Lifestrategy funds within an ISA?

    Thanks
    Metro

    @Adrian, TCA,Charlie – thanks for sorting that – I’ve linked to your comments to pick up the changes!

    @Metro There is no one answer because it depends on how big your ISA is. Given that info, head over to Monevator and plug your figures into this table of brokers to find a good match!

    […] One possible response is to try and become a materialist rationalist 5 but I can’t live like that although I entirely respect other people’s choices (and don’t claim I’m right either, buggered if I know). So I have to work with the frailty of human emotion, but I try not to be it’s slave, though I am sure that I don’t get that all right. I don’t have to hit every ball, just enough. And I do look in the rear-view mirror by unitising my results to ask the question ‘what would have happened if I invested every ISA allowance in VGLS100 or a UKX tracker. […]

     

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