How Do Vanguard LifeStrategy Funds Work?

TL;DR

Vanguard LifeStrategy funds offer five equity and bond mixes for different risk appetites, beginning with 20% equities and 80% bonds and rising in 20% equity increments to 100% equities. The funds use cash flows for cost-efficient rebalancing, include 25% UK equity exposure and 35% UK fixed-income exposure, and invest across almost 49 countries. Read on to compare their allocations, diversification and uses.

Transcript

hello and welcome to the latest in our insider interview video series today i'm joined by monique dia who is a product specialist on the vanguard life strategy fund range minite thanks for joining me today thank you it's lovely to be here so there are five funds in the range could you run through how they invest differently from one another and wha... Read More

Key Insights

• "each fund goes up in a 20 increment so we start with 20 equities and 80 bond for the first one" (0:39)
• "you can absolutely one investor can absolutely invest in more than one fund" (2:59)
• "what we try and do is use cash flows to rebalance" (3:24)
• "so we hold 25 uk exposure on the equity side and 35 on the fixed income side" (4:52)
• "we invest in almost 49 countries across the life strategy funds" (5:38)

Questions & Answers

Q: What are the five Vanguard LifeStrategy fund allocations?

The range contains five funds whose equity allocations rise in 20% increments. They offer 20%, 40%, 60%, 80% and 100% equity exposure, with bonds making up the balance where applicable.

Q: How do investors choose among Vanguard LifeStrategy funds?

The choice depends on risk appetite, investment goals and time horizon. Someone with a higher risk appetite could consider the 80% or 100% equity fund, while someone with a lower risk appetite could choose a lower-equity option.

Q: Can one investor hold more than one Vanguard LifeStrategy fund?

Yes, one investor can invest in more than one fund for different goals. The transcript gives the example of using the 80% equity fund for university fees needed in 15 years and considering the 20% or 40% equity fund for money needed in five years.

Q: Do Vanguard LifeStrategy funds change their asset allocation tactically?

No, the funds follow the same strategic approach to asset allocation. The transcript says their asset allocation mixes are not moved around tactically.

Q: How are Vanguard LifeStrategy funds rebalanced?

The funds try to use daily net cash flows to rebalance while staying close to their target asset allocations. This makes rebalancing more cost-efficient because selling existing positions would incur a cost.

Q: Why do Vanguard LifeStrategy funds have a UK home bias?

Research and client surveys found a strong investor preference for home-country exposure. Based on that research and feedback, the funds hold 25% UK exposure on the equity side and 35% on the fixed-income side.

Q: Why are Vanguard LifeStrategy funds underweight US equities?

The lower US allocation is mostly driven by the UK home bias. Increasing the UK weight means that the additional percentage must come out of the other building blocks, although the US remains one of the range's largest weights.

Q: How diversified are Vanguard LifeStrategy funds?

The funds invest in almost 49 countries despite their UK home bias. Their holdings also span different credit ratings, equity sectors and bond maturities.

Summary & Key Takeaways

• The Vanguard Life Strategy Fund range consists of five funds, each with a different equity and bond allocation, catering to investors with different risk appetites.

• The funds have performed well during market storms like the global financial crisis and Brexit, thanks to their transparent and strategic asset allocation.

• Investors can consider investing in multiple funds based on their investment goals and time horizon.