Vanguard Lifestrategy funds rake in £1.9bn despite shakier performance

Demand for Vanguard’s Lifestrategy range shows no signs of slowing, despite several of its funds experiencing a dip in performance as volatile markets and rising rates put its static allocation model to the test.

Vanguard is one of the few major UK fund groups that has consistently recorded net inflows this year, despite the volatile market backdrop.

While the rest of the industry haemorrhaged £4.3bn in May, the worst month since the Covid-induced panic of March 2020, the $8.1trn (£6.6trn) passives giant raked in £503m, according to data from Morningstar. This was second only to Legal & General Investment Management’s £1bn worth of net inflows.

Its biggest rival BlackRock saw £1.2bn of net redemptions, meanwhile. Over the past 12 months, Vanguard has now overtaken BlackRock for net flows, amassing £3bn compared to the latter’s £2.2bn.

Much of Vanguard’s success has been down to its Lifestrategy range, which has proved immensely popular with the IFA crowd, so much so that it has recently launched model portfolio versions of the mutual fund range.

Data prepared by Morningstar for Portfolio Adviser show Vanguard’s five Lifestrategy funds have taken in £1.9bn of net inflows so far this year. Lifestrategy 80% Equity has attracted the highest level at £718m, followed by Lifestrategy 60% Equity with £693m. The latter is the largest in the group with £13.7bn in assets, followed by Lifestrategy 40% and 80% which boast around £7.9bn each.

Lifestrategy duration remains well above rivals

Lifestrategy’s popularity has persisted despite warnings its static allocations could come under pressure in a more volatile market environment.

The £36bn range is fettered, meaning it invests exclusively in bonds and equities through Vanguard’s index range, and uses fixed rather than active asset allocation to keep costs low.

Having a set allocation to long-dated government bonds has fuelled the decade-long outperformance for the four funds with fixed income allocations. But with inflation on the move and central banks hiking interest rates in a bid to tame it, this could quickly become an Achilles heel.

In the previous low-interest rate environment, duration in the funds had drifted higher as governments and corporates snapped up long-dated debt on the cheap, skewing duration in the indices they tracked.

Duration in the four funds currently ranges from 9.1 to 9.3 years, which is well above peers in their respective categories.

Lifestrategy 20% Equity has the biggest discrepancy, with the fund’s duration of 9.24 years nearly two and half times higher than the Morningstar 0-20% Equity average of 3.81.

Performance starting to fizzle

Of the range, Lifestrategy 20% Equity has been the worst performer year-to-date, falling 12.5% against the IA Mixed Investment 0-35% Equity’s drop of 9.3%.

Lifestrategy 80% Equity and Lifestrategy 100% Equity have outperformed peers in their respective IA sectors so far this year, while the remainder have underperformed.

Source: FE fundinfo

So far, only Lifestrategy 20% Equity has registered outflows, with investors pulling £107m between January and May.

Tom Mills, senior manager research analyst at Morningstar, says this is consistent with other low-cost multi-asset funds in Morningstar’s conservative 0-20% Equity category, which have also seen weaker flows.

Attractively priced

Morningstar manager research analyst Thomas DeFauw does not believe a tricky short-term performance patch will hamper flows.

“The products are what they are, and Vanguard will rebalance to keep allocations static – often a couple times a week. In high volatility markets they grant themselves more leeway before rebalancing but never have they come near to the 2% hard-limit the firm sets itself.”

Dzmitry Lipski, head of funds research at Interactive Investor, says the Lifestrategy funds are designed to be a “long-term solution”.

“The primary purpose of bonds in Vanguard Lifestrategy funds is to reduce the risk of the overall portfolio and the funds offer a diversified exposure to bonds both short duration and longer duration that provides safety and income for the overall equity bond mix of the portfolio.”

Lifestrategy is also “attractively priced versus the competition”, DeFauw adds, something which is a clear advantage for long-term investors.

“BlackRock launched its ESG MA portfolio ETFs in September 2020, but AUM is still below €100m. Lyxor and Xtrackers are more expensive than Vanguard.”

Advisers must be comfortable with fixed allocation approach

AJ Bell head of investment analysis Laith Khalaf says, with fixed allocation strategies such as Lifestrategy’s, it is crucial advisers understand what they are buying.

“These aren’t the sort of funds you trade in and out of depending on prevailing market conditions,” says Khalaf.

“Advisers who choose the Lifestrategy approach simply need to accept that there will be good times and bad times relative to the mixed sector averages and should explain that to clients upfront so that performance updates are then in line with expectations.

“Any advisers who might have recommended the Lifestrategy funds on the basis of outperformance relative to the peer group, however, might find this a more difficult conversation to have.”

Lipksi adds: “Many investors might be very concerned and keen to change their portfolios to take advantage of the recent market developments, however history shows that it’s very difficult to time these changes and even professional investors have been inconsistent in adding value by employing tactical asset allocation.

“By changing your portfolio in response to short-term events may lead to higher trading costs and no extra return achieved. At II we believe that private investors are better off by setting the appropriate strategic asset allocation to suit their goals, then keeping their portfolio in line with it by rebalancing and ignoring short term market volatility.”