A couple of interesting docs from Vanguard

saveonarola

gadgetmind wrote: »

The second explains why Vanguard have constructed their LifeStrategy funds as they have regards bonds/UK/global, but sadly doesn't hint as to why they over-weight US, Europe, Japan and Pacific in the higher equity portfolios.

How did you come to the conclusion that they overweight developed markets in the higher equity portfolios? My back-of-envelope calculations for the 60% and 100% equity funds give the following:

Region: 60% fund weighting (as proportion of equity); 100% fund weighting

UK: 35%; 35%
US: 33%; 30%
Europe: 10%; 13%
Japan: 6.7%; 6%
Pacific: 5%; 6%
EM: 8.3%; 10%

To me, it appears that US and Japan are underweight and Europe, Pacific and EM slightly overweight in the higher equity fund.

gadgetmind

saveonarola wrote: »

How did you come to the conclusion that they overweight developed markets in the higher equity portfolios?

I was looking at the 80% equity fund. They have 34% in "Developed World ex UK", which I presumed weights all of the developed world (ex UK) by market size. They say - Europe 23%, US 57%, Japan 9%, Pacific 7%, Other 4%

They than add 5% more, which overweights it, and ditto Japan and Pacific ex Japan. They *don't* add more Japan, Pacific, and US for the 60% equity fund.

However, I wasn't really looking at the rather heavy weighting they have on the UK, which I guess dilutes everything in the equity portfolio down below a balanced global weighting. I guess I was looking at "equity ex UK" weightings were as you're looking at equity inc UK.

Or something!

saveonarola

gadgetmind wrote: »

I was looking at the 80% equity fund. They have 34% in "Developed World ex UK", which I presumed weights all of the developed world (ex UK) by market size. They say - Europe 23%, US 57%, Japan 9%, Pacific 7%, Other 4%

They than add 5% more, which overweights it, and ditto Japan and Pacific ex Japan. They *don't* add more Japan, Pacific, and US for the 60% equity fund.

However, I wasn't really looking at the rather heavy weighting they have on the UK, which I guess dilutes everything in the equity portfolio down below a balanced global weighting. I guess I was looking at "equity ex UK" weightings were as you're looking at equity inc UK.

Or something!

I see what you mean. It would be nice to think that it was all done purely on market cap (excl. UK), but clearly it isn't. I suppose it's not realistic to do it like that. Firstly, they can't change the percentages of different indexes in the fund every time the relative market caps of the different regions change. Secondly, because they make up each fund from other pre-existing funds, their flexibility is limited.

I noticed some problems with the figures in my post above, so I've just done the numbers again for the 60% and 100% funds, to remove one obvious error and to try to be a bit more accurate. They come out like this:

Region: 60% fund weighting (as proportion of equity); 100% fund weighting

UK: 35%; 35%
US: 33%; 31.4%
Europe: 11.2%; 11.9%
Japan: 5.7%; 5.5%
Pacific: 3.7%; 5.2%
EM: 10%; 10%

It's pretty close, and there are bound to be small discrepancies, rounding errors and mistakes (for example, I realise now that I included the Canada figure when calculating the US portion of the Developed World ex. UK fund). However, that chasm in the Pacific figure is a bit worrying. Someone holding the 60% fund has 30% less exposure to a very important region than someone holding the 100% fund. (Incidentally, the figure for the 80% fund is 4.1%)

Oh, well - I'm approaching analysis paralysis. I think it's probably time to pull the trigger.

gadgetmind

saveonarola wrote: »

Someone holding the 60% fund has 30% less exposure to a very important region than someone holding the 100% fund.

I'm not that blown away by Pacific Ex Japan as it's mostly diggers and Aussie banks.

saveonarola

saveonarola wrote: »

Region: 60% fund weighting (as proportion of equity); 100% fund weighting

UK: 35%; 35%
US: 33%; 31.4%
Europe: 11.2%; 11.9%
Japan: 5.7%; 5.5%
Pacific: 3.7%; 5.2%
EM: 10%; 10%

I checked this with Vanguard. The UK and regional equity allocations in the various LifeStrategy funds fluctuate on a monthly basis, to reflect changes in relative market capitalisation. But it's a flexible 'band' system, to avoid incurring excessive transaction charges, so the allocation will sometimes vary between different funds. Okay, those Pacific funds look to be operating in a pretty wide band, but that's what Vanguard told me and the guy I spoke to obviously knew what he was talking about.

gadgetmind

saveonarola wrote: »

Okay, those Pacific funds look to be operating in a pretty wide band, but that's what Vanguard told me and the guy I spoke to obviously knew what he was talking about.

There are lots of theories regards how out of balance you let things get before rebalancing. Wide bands let the winners run further and keep costs down, but you don't want to overdo it.

saveonarola

gadgetmind wrote: »

There are lots of theories regards how out of balance you let things get before rebalancing. Wide bands let the winners run further and keep costs down, but you don't want to overdo it.

The discrepancy is between the Pacific allocations in the two funds, not between the Pacific allocations relative to the other allocations in their respective funds.