Should you invest in Vanguard LifeStrategy funds?

The Vanguard LifeStrategy range is a family of five funds with different levels of potential risk and returns, constructed by blending a variety of passive funds together. In contrast to ‘active’ funds that employ fund managers to try and select the best-performing investments, passive investments or ‘trackers’ simply aim to replicate the returns of an index, say, the FTSE 100 representing the UK stock market.

How LifeStrategy Funds work

Each LifeStrategy fund offers cost-efficient exposure to a simple, diversified portfolio and is automatically rebalanced to maintain a specific asset allocation. At one end is the riskiest, LifeStrategy 100% Equity, which is solely invested in shares. LifeStrategy 20% Equity is most cautious in terms of its allocation with 20% shares and the rest in bonds.

Bonds are usually less volatile because they represent loans to companies and institutions rather than an actual slice of a company in the case of shares. Broadly, the higher the allocation to equities the riskier the portfolio in terms of ups and downs, though there can be time periods that represent exceptions to this general rule.

The set allocation of each fund saves the investor from rebalancing the weights of various funds or investment areas themselves. It prevents over or under-exposure to areas that do particularly well or badly, which helps prevent the risk level from drifting over time. All the funds in the range invest in a number of Vanguard's low-cost index trackers, providing access to thousands of international stocks and bonds across major markets to create a truly diverse portfolio.

Table: List of Vanguard LifeStrategy Funds available through the Charles Stanley Direct Investment Service (either as income or accumulation units):

• Vanguard LifeStrategy 20% Equity
• Vanguard LifeStrategy 40% Equity
• Vanguard LifeStrategy 60% Equity
• Vanguard LifeStrategy 80% Equity
• Vanguard LifeStrategy 100% Equity

For those looking for a good-value, low-maintenance and broadly spread portfolio a LifeStrategy Fund could help form a simple and inexpensive ‘core’ in a portfolio around which other investments can be added to personalise. However, like any investment, it should be reviewed periodically to ensure it continues to meet objectives.

Fund characteristics evident in recent performance

While there are significant advantages to the simplicity of this fund range, there are also some aspects investors should be aware of. Firstly, although exposure to bonds has historically had a dampening effect on the more volatile returns from shares (generally because bonds can weather recessions better than equities), this hasn’t been the experience in recent years. With bonds struggling, the more bond-heavy LifeStrategy funds have at times declined in value more than the ones mostly or wholly devoted to equities.

The reason for this was the dramatic shift in inflation expectations and the anticipation of much higher interest rates necessary to curb price rises. This meant a significant ‘reset’ in the value of almost all assets to provide investors with the higher return they demand from a different outlook. The higher inflation and interest rates go, the more investors require in terms of return from financial markets, and bonds are particularly sensitive to this effect because they typically have a low, fixed level of return. It isn’t a problem confined to the LifeStrategy range, it has affected all funds to one degree or another, though adding some more specialist investments for further diversification potentially could have helped.

Performance has also been hampered by a ‘home bias’ over the past decade. Although the share component of the funds is global, the funds are for UK investors so there is a bias towards domestic companies. It’s about a quarter of the share component of each fund, which is considerably higher that the UK’s weight in major global share indices, which is about 4%. The UK market has been a laggard over the past ten years, especially versus the dominant US markets, though it has typically shown more resilience in times of stress.