The 10-year returns are in for the Vanguard LifeStrategy funds. Forget the birthday celebrations and keep your cake, I hear you cry. Just tell us did the passive fund-of-funds deliver?
- Did LifeStrategy investors earn respectable returns over the last decade?
- Did the passive fund family hold its own against active funds that promise to beat the market like a drum?
Well, without wanting to spoil the surprise… if you invested in any of the Vanguard LifeStrategy funds a decade ago then you can be quietly pleased with yourself today.
Vanguard LifeStrategy 10-year returns
Here’s the 10-year returns for the entire Vanguard LifeStrategy range:
Source: Trustnet. Nominal1 annualised returns to 19 July 2021
Ten years ago, a LifeStrategy 100% investor might have hoped for around 7.5% annualised over the next decade (assuming they added average long-term inflation of 2.5% to an average historical equity real return of 5%.)
But expected returns were typically more pessimistic back then. For instance, the Financial Conduct Authority had recently published a real2 expected return range of 2.6% to 3.8% for a 60:40 equity:bond portfolio.
Call that 5.1% to 6.3% in nominal annualised terms.
As it turned out though, Vanguard’s LifeStrategy 60% bagged 8.4% annualised returns over the last decade.
Maybe there’s time for a slice of that cake, after all?
Risk versus return
The table above also shows the price paid by cautious LifeStrategy investors during a decade of high equity returns.
Each 20% allocation to bonds rained on the returns parade as surely as a low pressure front hovering over your BBQ plans.
The 10-year cumulative returns show most clearly what you had to give up in exchange for lowering volatility:
Source: Trustnet. Nominal cumulative returns to 19 July 2021
Still, a wince now beats the pain of panicking and selling out during a market bloodbath to come.
I’m not going to dwell on the risk-reward trade-off. The fact is a 100% equity allocation is not to be taken lightly. It is definitely not for most people.
Most of us will do better to be happy we enjoyed one of the all-time bull runs and maybe draw a few conclusions about the future. Such as that our past good fortune does mute the market’s prospects for the next decade.
With that said though, it’s arguably the bond-packing funds in the Vanguard range that have covered themselves in glory, not LifeStrategy 100%.
Yes, the equity-only LifeStrategy fund has done a solid job. But it hardly shot the lights out for the extra risk, compared to say LifeStrategy 60%.
LifeStrategy 100% returns vs the Rest Of The World
Vanguard LifeStrategy 100% is comfortably mid-table versus other geographic bets you might have made a decade ago:
Nominal annualised returns to 16 July 2021.
The real comparison here is between the iShares MSCI World ETF and the LifeStrategy 100%. You could have plausibly chosen either option ten years ago to gain cheap exposure to globally diversified equities.
As for the other funds, they help illustrate which regions flourished and why that cost the Vanguard fund.
Home bias – that is, an extra dollop of UK equities compared to a true global tracker – bit LifeStrategy investors over the last decade.
The LifeStrategy 100% fund is 22% in UK equities. Not helpful in light of the London market’s laggy performance over recent years.
In contrast the MSCI World tracker held less than 10% UK equities in 2011. That allocation is below 5% now.
The MSCI World also excludes the emerging markets.
Instead, you got an extra shot of US equity espresso in your portfolio vs LifeStrategy.
So if you ignored all the advice last decade that US equities were overvalued – congratulations!
But if your next move is to double-down on the US then you’re a braver soul than I.
S&P 500 valuation levels have passed eve-of-the-Great-Depression base camp and are closing in on dotcom bubble peak.
Strategy versus tactics
On the upside, Vanguard LifeStrategy 100% still beat its investment category benchmark, according to financial data shop Morningstar.
Morningstar gave the fund its Silver award – which ranks it in the top third of its peer group, including active fund managers.
Yet the point of LifeStrategy funds is to be a portfolio in a box.
One buy gets you all the diversification you need, including defensive bonds.
So a better comparison pits LifeStrategy 60% against a classic 60:40 equity:bond portfolio.
LifeStrategy 60% returns vs the Rest Of The World
And the bad news is that LifeStrategy 60% lost out to a passive 60:40 portfolio.
I compared the Vanguard fund-of-funds to a simple two-fund portfolio using ETFs that were available in 2011.
Cumulative returns for the last 10 years were:
- 125% Vanguard LifeStrategy 60%
- 158% iShares Core MSCI World / iShares Core UK Gilts
(60:40 portfolio data from justETF)
Home bias is my prime suspect again, but I admit I haven’t dug into the differences in bond holdings, fees, or rebalancing. (I’d shoot myself in shame – if I wasn’t so passive.)
Life is the name of the game
Now for the good news!
LifeStrategy investors can stop beating themselves up because every fund bar LS100% is the holder of a Morningstar Gold award and five-star rating.
- A gold badge means the fund ranks in the top 15% of its peer group for returns after fees.
- Five stars means the fund delivered top 10% risk-adjusted returns in its category over the last 10 years.
Note: This is all according to Morningstar’s methodology and category definitions.
LifeStrategy 60% ranked as high as the 4th percentile in its peer group in 2016:
Morningstar. Vanguard LifeStrategy 60% – percentile rank in category (2014 – 2021).
It’s also important to emphasise that the LifeStrategy funds have trumped the majority of their actively managed peers.
Granted, we can all easily find a handful of active funds that smashed the last decade.
But the trick is to find them in advance. Wisdom after the fact is self-satisfaction dressed like a hipster.
Chart attack
LifeStrategy 60% investors can also enjoy this Morningstar chart of their fund trouncing various benchmarks:
And here’s the Vanguard fund pounding its multi-asset rival – BlackRock Consensus 60:
Note: The comparison begins from the inception date of the BlackRock Consensus 60.
I score this as a triumph in the age-old morality tale of simplicity versus complexity.
The BlackRock Consensus funds’ USP is they hold index trackers with an active management tactical twist.
It turns out we don’t need it, going on the results so far.
Getting on with life
What do 10-year returns tell us? Nothing about the next ten, sadly.
Still, I think the LifeStrategy returns are power to our passive investing elbows.
We’re told to invest for the long-term. But it’s hard to stay true for decades. Especially when we’re battered by outlier success stories all the livelong day. Sometimes it can feel like we’re extras in someone else’s virtual reality bliss machine.
So I think it’s worth celebrating that ordinary investors can get a fair shake just by choosing a simple, well-designed fund that saves you a ton of time and worry.
Take it steady,
The Accumulator
I have an absolute ton of stuff going on in my life. I struggle to get any time to think and plan.It would be impossible for me to buy shares or even a portfolio of managed funds, and keep on top of it.
The VG life strategies 60 and 80 have been just brilliant for me, and my wife. Just set it and forget it.
LS funds are great all round for every type of investor (their Target Date funds are a similar beast) – anyone sticking their hard earned funds in them get no argument from me.
You touch on it but I’m always curious why Vanguard doesn’t have a “classic” 60:40 fund – i.e. 60% (or whatever % you desire) properly proportioned equities (no UK/home bias) using something like their Global All Cap fund and the rest in bonds.
The mixing and matching of equity funds seems needlessly fiddly from the otherwise Kings of Simplicity.
Thanks @TA. It was chancing on this blog from a Google search when I was worrying whether it would be too much of a risk DIYing investments that gave me the initial confidence – and after reading a whole bunch of your articles to go simple and buy LifeStrategy.
At the time I did my own number-crunching on the various alternatives. The other thing besides returns that I looked at was volatility. As I understand it, volatility is quoted as the standard deviation over the period, so simple statistics allows calculation of a 2.5% chance downside of return less two times standard deviation. Just recalculating using easily available 3 year figures on Trustnet, that gives a worst case return (1 in 40 chance) of only 1.1% over the 3 years for LS100 (0.3% annualised), 3.8% for LS80 (1.2% annualised), 5.9% for LS60 (1.9% annualised), 7.3% for LS40 (2.4% annualised) and 7.7% for LS20 (2.5% annualised). Trustnet only quote 3 year volatility, I don’t know whether subscription sources have more.
The experts will no doubt have a better way of assessing volatility risk, but that was what I found useful. I don’t know whether there is a way of finding the data for that sort of analysis over the 10 year existence of the funds.
I’ve been fire and forget in lifestrategy for years, but now I want to look at ESG. It would be great to see something on building a lifestrategy replacement using ‘passive’ ESG. (I get that ESG cannot really be pure passive, but it looks like Vanguard have competitively priced indexers)
Thanks for the review – a good read!
Big fan of the LS funds, in particular the 80 as the main core workhorse in my portfolio – simple, cheap, diverse, passive.
Quite frankly I can’t be ars*d to spend hours reviewing active shares and funds, indexes, balancing other than every now and again. LS fits the bill almost perfectly and makes up the majority of my portfolio. One minor gripe with LS range is that it doesn’t include small-cap and some other sectors, so I have added both global and FTSE 250 small-cap indexes into the mix, plus a property index, corporate bond index, commodity ETF and a few active funds and investment trusts as satellites.
Thanks for this review TA…very interesting analysis. From memory, the UK allocation in the early years was actually 33% so even more of a drag.
I don’t expect returns over the coming decade to be so good with all the uncertainties arising from Covid and climate change. I am hoping Vanguard will seriously think about bringing an eco-friendly version of Lifestrategy to the market with a focus on ESG and green sovereign bonds.
I am 100% equities , £1.4 mil in VWRL(P).
The thing I love about it is that during market dips like last year I can confidently continue to plough in money without agonising.
Any dips just look like opportunity, the bigger the better. No worrying about if an individual company, country, or sector is going bust.
@diy investor (uk)
Yes, I hope so too. Another (minor) gripe I have with the LS range. I would certainly prefer to be in an index that slants a bit more towards ESG, even if it means a slightly higher charge. I emailed Vanguard directly a while back to query this and their reply said ‘there was no interest’, or words to that effect. Personally, I disagree. Especially as they do offer an ESG version of the dev world index already. Plus asset managers like L&G are offering a L&G Future World Multi-Index now, which I hold a bit of a SIPP, so I think it will go that way in time, be it via asset managers screening or the companies cleaning up their act under pressure. Looking at the IPCC report, it has too.
Thank you for the detailed analysis.
It’s worth emphasising the “invest and forget” simplicity, particularly no need to rebalance, even when continuing to subscribe to an ISA etc every year or on a monthly basis.
I now only ever invest in passive multi asset funds. The ones I use the most are Vanguard LS 80, HSBC Global Strategy Balanced and L&G Multi index 6.
So far LS 80 has performed best follows by HSBC and then L&G.I keep thinking I should bite the bull and put everything into LS80 but for some reason I feel nervous about eggs in one basket.
Any thoughts?
I have a big chunk of my portfolio in lifestrategy funds. I think home bias has hit them but it’s not too bad. For tax reasons it’s worth me holding on to them for now even though I live abroad but I’ve tried to balance out the home bias.
Had the pound done well against the dollar, like many other currencies in the last decade, home bias might have been a good protection but as it was it sank after the brexit vote and even though the multinationals in the ftse100 shrug most of that off it still hit.
I think the LS range is great. I point relatives who I know will not rebalance their investments towards them, although for younger ones I suggest a global tracker.
10 years ago could not have been a better time to launch the funds. I have estimated what the returns in the previous 10 years might have been by annually rebalancing an equity portfolio consisting of 75% MSCI All Country World Index ex UK, 25% FTSE all-share with 10 year gilts. From the end of 2001 to end 2011, LS100 to LS20 would have managed growth rates of 4.2%, 4.8, 5.2%, 5.4% and 5.5% respectively. Gilts outperformed equities in the period with a rate of 5.5%. Hard to see how 10 year gilts would do that over the next 10 years, but there should still be a diversification benefit or “Rebalancing Bonus”. The rebalancing bonus for my simulated LS funds were 0.07%, 0.33%, 0.48%, 0.46% and 1.0% for LS100 down to LS20.
I would prefer it if the LS funds did not overweight the UK market as well, but that has not stopped me recommending them. I really have no opinion on whether the UK market will underperform or outperform in the future, but if you trust to historic observed behaviour on valuation/CAPE it has a higher chance of outperforming than underperforming.
I make the UK allocation closer to 25% by the way. From the Vanguard web site for LS100:
FTSE U.K. All Share Index Unit Trust GBP Acc 19.24%
FTSE 100 UCITS ETF (GBP) Distributing 4.58%
FTSE 250 UCITS ETF (GBP) Distributing 0.92%
I moved a variety of pension funds into the Vanguard 80/20 years ago. Absolutely zero regrets. I do chew my nails over the market, especially in the US, and worry about corrections, but I’ve lived and invested through the 2000 dot com bust, the financial meltdown of 2008 and the Covid collapse of last year. I took it steady. And I intend to do so going forward, helped by the guiding hand of Monevator.
@Jonathan B, You can download historic daily NAVs for the LS funds from the Vanguard web site and use those to calculate volatility. You need to be able to find your way round a spreasheet, but it is not difficult. Select the Financial Advisor/Professional Investor tab first, otherwise you don’t get the option to download the prices.
For each day calculate the ratio* of NAV from the previous day’s NAV for the period you are interested in, then calculate the standard deviation of those numbers. That gets you daily volatility. To get annual volatility multiply by the square root of 252.
* It is preferable to use the natural log of the ratios for reasons I will not go into, but for what you want the ratio is just fine.
@Naeclue, thanks. At some point I did see if I could find the raw figures and quite likely my failure was due to honesty, ticking the “personal investor” box.
But actually the precise numbers didn’t matter so much as having a reasonable way to compare volatility and return on the same basis for all the funds I was considering. The longer the period the better though, the last 3 years (with the Covid drawdown, and a slightly bumpy period early 2019) shows more volatility than 5 years ago.
For interest how would a portfolio of (say) work out?
70% a world balanced index
+
30% deposit/savings account (near zero volatility)
Hi
How would such a portfolio compare? say.
75% world tracker
+
25% deposit/savings accounts (near zero volatility).
@Jonathan B, here you go. Historic LS100 standard deviations, calculated using daily NAV changes over the previous year.
Date 1yr stdev
02 Aug 2021 11.72%
03 Aug 2020 24.76%
01 Aug 2019 12.19%
01 Aug 2018 10.32%
01 Aug 2017 10.04%
01 Aug 2016 15.34%
03 Aug 2015 10.78%
01 Aug 2014 8.31%
01 Aug 2013 10.57%
01 Aug 2012 18.28%
Lots of volatility last year for some reason 😉
@JonathanB Don’t get hung up on volatility, the precise numbers have little value in telling you what may happen and presumes a normal distribution.
If you want an interesting read try Radical Uncertainty by John Kay and Mervyn King, real food for thought. I listened to Mervyn King talking about the book and answering questions in February 2020….very apt.
@HariSeldon “Don’t get hung up on volatility, the precise numbers have little value in telling you what may happen and presumes a normal distribution.”
Yes I agree. Even if returns were normally distributed volatility does not stay constant over time anyway.
All we can reasonably do is use volatility as a comparison tool for what might happen in the future. LS100 will likely continue to be more volatile than LS60, etc.
@oldie, bonds, as used in the LS funds, usually give better diversification than cash, but not always. I switched cash last year, but temporarily have some ISA money parked in a short dated corporate bond fund. Cash just feels safer to me right now, but I have little confidence in it being the right thing to do and am happy to recommend the LS funds to people I know.
@Chris Moore
Look at swapping HSBC Global Strategy Balanced for their “Global Strategy Dynamic” fund. It’s closer to 80% equities and has performed very similarly to LS80. No home bias but does use corporate bonds.
I use it for a little diversification from Vanguard. Could also come in handy to switch between the two when harvesting capital gains.
@Naeclue, thanks, interesting. The year-to-year differences are actually bigger than I had guessed they would be. I assume those differences would converge as you take longer timescales to something more representative – but perhaps I am hoping for too much.
And @HariSeldon, I know what you mean but as far as I know it is the only standard measure that allows that comparison. It helped me make my decision at the time.
@TA ‘But if your next move is to double-down on the US then you’re a braver soul than I.’
Pretty much every article these days seems to predict meagre returns ahead for the US and equities in general. But on the other hand.. Semiconductor fabs are so full that we cant make enough cars, the space race is back on (think small satellite constellations not Billionaires), electric motors are about to replace combustion engines – by decree, De-fi is on the verge of being the next ‘internet’ (we just dont know how to use it yet), Apple is thriving without Steve Jobs, I could go on. I guess even if they are overvalued, US stocks in particular look like where the long term value is to me. I’m not quite doubling down yet though:)
Nice article, however I must question the comment: “Yes, the equity-only LifeStrategy fund has done a solid job. But it hardly shot the lights out for the extra risk, compared to say LifeStrategy 60%.” The question is: What extra risk? Covid aside, there were no major stock market shocks in the last decade and so we have no real idea of the degree of protection (if any) afforded by a bond allocation.
@oldie if you want to see the effect of holding cash instead of bonds, one option is to have a play with portfoliocharts.com. Under Portfolios, My Portfolio, you can dial up any mix of assets you like and see how it would have performed over the last 50 years. I investigated cash vs bonds this way some time ago and came to the conclusion that holding cash instead of bonds made barely any difference to stability (drawdowns) but did slightly reduce return (e.g. for a 70/30 portfolio from 6%-ish to 5%-ish). That boost to return from bonds is probably largely due to falling interest rates over the last ~30 years, and with current government bond yields no better than cash interest rates there may not be much penalty from holding cash now.
Given all the chatter about inflation recently, I decided to sell my bonds and sit in cash for a year or 2, after which it hopefully will be a bit clearer whether higher inflation is going to stick. If inflation does return to recent low levels, I will have sold out at the bottom and lost 10% of my bond value, but I decided to take that hit to avoid a possibly much larger loss.
@ Andrew Barber – spot on. I know plenty of people who don’t have time to get into the investing weeds. LifeStrategy takes the worry away for them.
@ Neil – a good point. Vanguard’s UK version of LifeStrategy were marketed quite early after Vanguard’s arrival in Europe. I think the bias helped establish them in the UK before the gospel of global diversification had spread much over here. Funds like Global All-Cap came later.
@ JDW – that Vanguard is surprising given the scale of ESG. I wonder how much interest is needed to shift the needle for a company their size. What ties me up in knots is how trustworthy ESG designations are.
@ Chris Moore – strategically it’s wise to diversify into at least one other fund provider.
@ Oliver – agreed, nothing was written in the stars. Home bias could have worked in your favour. It could still work in your favour in the coming decade.
@ Calculus – it’s always fun to speculate. Allow me to play devil’s advocate…
US stocks have reached valuation levels associated with the Great Depression and dotcom bust. The bubble bursts, COP26 is a failure and near-term climate change shows we’re on a more extreme path than previously hoped. The Democrats lose control of Congress in 2022 and fail to pass meaningful climate change or Protect The Vote legislation. Trump is returned to office in 2024 in a disputed election. Social division in the US accelerates while the Republican Party under Trump further dismantles Democratic norms. Trump formalises the new cold war with China and raises trade barriers against Europe. Globalisation retreats, the Nato alliance exists in name only, while governments increasingly struggle to cope with multiple, simultaneous crises induced by runaway climate change. US stocks fail to recover as social disorder and crony capitalism choke the economy.
I hope your possible timeline is the right one! I love furturology though.
@ Dave P – take a look at the longer term historical record to see what equity risk can look like and how bonds cushion the blow. The risk didn’t manifest over the last decade but that tells us nothing about the next 10 years. TI linked to a great article over the weekend that shows what a nightmare decade can look like, and did for some investors:
https://ofdollarsanddata.com/my-investing-nightmare/
It’s a bit irresponsible to say valuations are near dot com levels, when it’s obvious that the denominator is made up of probably the worst 4 trailing quarters’ earnings in a decade.
If the past 12 months earnings were normal and the valuations are what they are now, sure there is a bubble.
@TA- “What do 10-year returns tell us? Nothing about the next ten, sadly.” Too true- as per the tiny writing on the bottom of every active fund prospectus. However, what does 10-year data on Vanguard’s fees tell us? Everything about the next ten, hopefully- they will be 0.22%
It’s all we can control
Windy
@BuildBackBetter — It’s not ‘irresponsible’, it’s a fact, though there’s a debate about *how* ‘near’.
Unfortunately you don’t seem to subscribe to comments or read replies, which is a shame as you might learn something. Such as from my reply to your last comment about CAPE, which you incorrectly stated was based on the past four trailing quarters of earnings. See:
https://monevator.com/the-slow-and-steady-passive-portfolio-update-q2-2021/#comment-1312558
Hopefully you will read this one and I can stop replying to you. 🙂
I’m a fan of LifeStrategy, I started with most of portfolio in LS60, but added some LS80 over time to get towards a blended LS70. I considered moving my SIPP to Vanguard. What stopped me was the lack of ESG tilt options. Like another commentator, I approached them directly and was told there was no interested or demand!
Instead I’ve been contributing to L&G FutureWorld Climate Change Equity and Vanguard bonds.
@windy, actually windy, I believe they were 0.26pc on launch and went down to 0.24 and then 0.22, although happy to be corrected
The Accumulator: Yes, I’m well aware of the historic value of bonds as a counterbalance. However, I question the real protection, if any, that they provide in the here and now. Over the last few years I’ve read numerous articles questioning value of bonds and their negative real returns which make me question their true value in a portfolio. Far from being any kind of cushion, it strikes me that they could in just as easily be a simple drag on returns with no actual real benefit in a crisis. For disclosure, I sold off my bond allocation some years ago.
The majority of underperformance of LifeStrategy 60/40 versus say a portfolio of Ishares MSCI World and Total Gilts is mainly due to Vanguard´s currency hedging which certainly reduced returns post the Brexit referendum sterling crash. It is only relatively recently that Ishares has offered a Sterling hedged MSCI World ETF so direct comparisons with LifeStrategy are difficult.
@ Max – LifeStrategy 60 doesn’t hedge equity returns. It does hold various global bond funds that are hedged. LifeStrategy ex-UK equities benefitted from the sterling nosedive.
@ Dave P – I understand your doubt. I went through a similar process and concluded that while the outlook for bonds isn’t great, there’s no better alternative in a crash. Long bond convexity means they still retain their power to counter-balance when rates fall even below zero.
Bonds have never counter-balanced every recession but they still offer diversity value. I am holding less in bonds than I originally intended though, and have/am selling off my short bonds / holding more cash instead.
@The Accumulator: I’m currently holding 10% Index Linked Bonds, 10% Fixed Interest Bonds, 10% cash and 70% Global Equity. All passive.
Just wondered what your split of Index Linked and Fixed interest is currently?
@TA On the futurism re US outlook, thanks, you’re right to game out worse case geopolitical scenarios! – while that should help drive a (perhaps increased) % reserve asset allocation – Id counter that if the US does go down – it will take the rest of the globe with it, so its hard to make a case that we should under/overweight equity from that perspective. We could also say the US has been quite resilient in absorbing the last years relatively stressful events.