The 10-year returns are in for the Vanguard LifeStrategy [1] funds. Forget the birthday celebrations and keep your cake, I hear you cry. Just tell us did the passive fund-of-funds [2] 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:
[3]
Source: Trustnet. Nominal1 [4] 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 [5] back then. For instance, the Financial Conduct Authority had recently published a real2 [6] expected return [7] 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 [8]:
[9]
Source: Trustnet. Nominal cumulative returns to 19 July 2021
Still, a wince now beats the pain of panicking [10] and selling out during a market bloodbath to come.
I’m not going to dwell on the risk-reward [11] 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:
[12]
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 [13] 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 [14] – 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 [15].
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 [16])
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:
[17]
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:
[18]
And here’s the Vanguard fund pounding its multi-asset rival – BlackRock Consensus 60:
[19]
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 [20] 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