The Vanguard LifeStrategy range of funds has just celebrated 10 years since launching in the UK, over which time it has proven to be a big hit with investors, amassing £29 billion of assets to date.

Performance has been strong too, with the LifeStrategy funds beating most active funds in their sector over the past decade, quite a feat for a passive investment vehicle.

However, performance has been more muted in the past year or so, and the future may not look quite as rosy as the first 10 years for these funds.

WHAT IS LIFESTRATEGY?

The appeal of the LifeStrategy funds is clear to see. They offer simple, low-cost exposure to global stocks and bonds.

There are five funds in the range. Vanguard LifeStrategy 100% Equity (B41XG30) invests in global stocks, with the portfolio approximately split half in US-listed companies, nearly a quarter in UK shares and the rest from Europe and Asia.

The other four funds in the LifeStrategy range have varying amounts of exposure to equity markets, and the remainder in bonds, so investors can choose a fund which meets their appetite for risk.

For example, Vanguard LifeStrategy 80% Equity (B4PQW15) has 80% of its assets in shares and 20% in bonds. Vanguard LifeStrategy 40% Equity (B3ZHN96) has 40% of its assets in shares and 60% in bonds.

The funds across the range are regularly rebalanced to maintain a fixed allocation to equities and bonds as specified in the product name. This makes things easy for investors who want a mix of assets but don’t want to manage a large portfolio of funds themselves.

HOW HAVE THEY PERFORMED?

Since launch, the LifeStrategy funds have outperformed the average fund in their respective sectors.

It might sound strange that a passive fund can outperform, particularly by the margins clocked up by the LifeStrategy funds. But they have not beaten the stock market indices they are tracking.

After costs are deducted, that’s impossible. Rather they’ve outperformed their respective sectors, which are made up of other active and passive funds which have a similar split between stocks and bonds.

The relative performance of the LifeStrategy range doesn’t come down to active management decisions that are right or wrong, but rather to the design of the funds. They simply do what they say on the tin, and in some markets conditions they will fare well or badly compared to peers.

The past decade and more has been characterised by ultra-loose monetary policy, which has seriously boosted the returns provided by bonds.

That’s helped the mixed LifeStrategy funds compared to their competitors, because many active managers have dialled down their exposure to bonds, believing that a bubble has been stoked by the quantitative easing programmes of central banks.

While that rationale certainly has merit, avoiding bonds has been the wrong investment decision, until recently that is.

DISADVANTAGES OF HOLDING BONDS

The success of the vaccine programme has prompted markets to consider when central banks might stop administering life support to their respective economies and unwind quantitative easing. As a result, the mixed Vanguard LifeStrategy funds have fallen down the pecking order over the past year.

This is perhaps a sign of things to come. If the economic recovery continues apace, or worse, inflation takes hold, we can expect further pain in the bond market.

This would likely make it harder for the mixed Vanguard LifeStrategy funds to perform well compared to active peers, which can reduce their bond exposure and increase exposure to other areas like shares, gold, property and cash.

If the past 10 years have taught us anything, it’s not to write off the bond market, and the longevity of ultra-loose monetary policy. However, at some point, central banks will tighten monetary policy, and the big tailwind that has filled the sails of the LifeStrategy range in the last decade may well moderate, or worse still, go into reverse.

While the LifeStrategy funds are designed as a one stop shop for investors, they can also be blended with other mixed asset funds to create a portfolio that has a few different approaches to asset allocation, which will perform well at different points in the market cycle.

That should help to smooth out volatility in a portfolio without denting long term returns, and there’s no need to go overboard in terms of the number of funds in a portfolio.

WHY THE 100% VERSION IS DIFFERENT

It’s worth mentioning the Vanguard LifeStrategy 100% Equity fund, which is a bit different because it has no bond exposure. Performance has not been quite as stellar, particularly compared to the global stock market, as measured by the MSCI World Index.

That’s because this fund has a higher weighting to the UK stock market, which has been a laggard on the global stage in the last 10 years. 

The annual charges for the LifeStrategy funds are 0.22% per year, and you can’t get a mixed asset fund much cheaper than that.

However, there are cheaper global tracker funds available which do a similar job to the LifeStrategy 100% Equity fund, such as Fidelity Index World (BJS8SJ3), or the Lyxor Core MSCI World ETF (LCWL), both of which are available for just 0.12%.

These funds don’t have as high a weighting to the UK as the LifeStrategy funds, and you might feel that’s an advantage for the Vanguard fund. Or you might agree with the late, great, John Bogle, the founder of Vanguard and grandfather of index investing, when he said: ‘Common sense tells us that performance comes and goes, but costs go on forever.’

DISCLAIMER: Daniel Coatsworth who edited this article has a personal investment in Fidelity Index World.

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