Vanguard Lifestrategy’s static bond allocation raises concerns over mounting inflationary pressures

Having a fixed allocation of long-term government bonds fueled the outperformance of the Vanguard Lifestrategy line for a decade, but with the vaccine’s global rollout and positive economic outlook, is it time to reassess this? allocation ?

Vanguard’s Lifestrategy lineup is now close to £ 30bn in size and, although passive, data from FE Fundinfo shows all five funds topped the IA Mixed Investment industry average 40-85% Shares.

From June 2011 until the end of June of this year, the funds generated returns of between 73.6% and 179.2%.

However, with four of the five funds having a defined exposure to long-term government bonds, AJ Bell financial analyst Laith Khalaf questioned whether this fixed allocation could lead to performance issues as the vaccine deployment progresses and the economy grows stronger.

“If we enter a period of heightened inflationary pressures and tightening monetary policy, the Lifestrategy funds may find that their fixed exposure to long-term bonds makes their performance more difficult. While active funds can adjust their asset weights according to prevailing market conditions, passive funds like Lifestrategy do not, ”he says.

“If the last 10 years have taught us anything, it is not to cushion the bond market and the longevity of an ultra-accommodating monetary policy. Additionally, Lifestrategy’s rebalancing of a fixed asset allocation acts as a natural curb on exuberance, removing money from areas that have performed well and recycling it to areas that have performed poorly. However, in the event of a bond sell-off, that would mean continuing to buy bonds on the downside, and in a prolonged bearish bond market, that could prove to be painful. “

Review of allowance

Independent wealth management consultant Adrian Lowcock agrees the range is particularly vulnerable to a shift in the outlook for interest rates due to exposure to longer-dated government and corporate bonds.

However, he adds, “Vanguard probably won’t be overly concerned given the nature of the product and its own opinions. They believe that the bulk of returns come from strategic asset allocation and not from stock selection or tactical moves in asset allocation.

“Plus, costs play a big role in long-term returns, so Vanguard keeps the product line simple enough to keep costs down and reduce their impact.

However, the latest investment association fund flow data suggests investors aren’t too concerned about the recent bond sale, with IA Mixed Asset 40-85% stocks named top-selling sector in May, earning £ 692million in net retail sales.

“It reminds us that some investors are still looking for an element of resilience in their investments, despite the strong market returns over the past year,” said Kate Marshall, acting head of investment analysis at Hargreaves Lansdown. “Funds in this sector invest in part in bonds and cash, so they are not always fully exposed to the volatility that often accompanies purely stock market investments. “

See also: Christopher Bishun: How is Vanguard Lifestrategy performing compared to active alternatives?

Other alternatives exist

While the passive, low-cost range of Vanguard Lifestrategy Range will appeal to some, there are similar active options available that would be better placed to navigate a drastic shift in the bond market.

Khalaf highlights the Personal Assets Trust and Rathbone Total Return funds for the more conservative investors, both of which offer investors a mixed portfolio of assets but are actively managed.

“They have a larger toolbox than Lifestrategy funds for navigating markets, using other assets like gold and cash in the portfolio,” he says. “As active funds, they come with higher annual fees, 0.57% for the Rathbone Total Return fund and 0.73% for Personal Assets Trust, compared to 0.22% per year for the Lifestrategy range.”

BlackRock’s Consensus line, also passive, is widely regarded as the main competitor to Vanguard funds. However, the difference of this fund is that it has no fixed exposures to stocks and bonds and instead follows the average allocations of UK pension funds.

See Also: Lifestrategy’s Rival Blackrock Invites Shared Views on Static Allocation

Life strategy to stay popular among investors who prefer someone else to do the job

For Lowcock, however, almost regardless of the broader market movements, Vanguard has its place in most portfolios.

He says: “Instead of trying to be everything for everyone, Vanguard has focused on offering a range that addresses a key aspect of long-term performance – strategic asset allocation. – and manages it on behalf of investors. This approach is simple and inexpensive when executed well.

“For new investors, or those who prefer to let someone else do the work, the solution is likely to remain attractive even if past performance cannot be guaranteed.

“For more experienced investors and those who want to add a little more to their portfolio, the Vanguard range is a good basic solution that can be supplemented with other options, so that exposure to long-term bonds does not form as a segment of the whole and adds to diversification. . “

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