Vanguard Life Strategy

bowlhead99

takesyourchances wrote: »

was thinking over the weekend rather than a managed fund about the Vanguard Global Small Cap tracker if it could be a sensible long term add to go with the VLS 60% core and other side funds, one of which is the Standard Life Global Small Cap fund, but the Vanguard would be global passive tracker approach for small cap and a lot more holdings.
VLS 60% as the core (65/70%)
Vanguard Global Small Cap Tracker - New idea for addition
Standard Life Global Small Cap
[Asian / Emerging funds]

IMHO, you need to decide what approach you want to take to each sector you're putting in your portfolio.

For smallcaps, if your approach is just buy lots of smallcap companies aroung the world weighted to their value, that's fine. If your approach is to pay more fees to an active manager to focus the global smallcap holdings into ones which they think will do better, that's fine. But it seems quite bizarre to decide that both are valid suggestions, so you'll do both. I mean, why not just find 200 funds that seem to be valid suggestions and weight them all at 0.5%. Man up and take a decision.

As mentioned elsewhere, I hold the global smallcap tracker alongside the LS fund to give me some general global exposure to smaller companies, in the same way I hold the LS to give me general global exposure to larger companies. Then I use satellite funds to modify the allocation as the mood takes me(e.g. by using regional specialist smallcap funds to give me greater exposure to Europe or Asia or UK or whatever, while skewing it away from US). Adding a global index smallcap fund as a satellite to a global active smallcap fund, or vice versa, wouldn't seem to make a lot of sense.

bertpalmer wrote: »

Another 100% holder here.

I'm thinking of adding an American tracker type fund, similar to the VLS. I've heard good things about America and am looking for something else to diversify in to.

Any suggestions? Thanks in advance.

There seem to be a few things wrong with those sentences.

- An american tracker fund is not similar to the VLS as the latter has a load of exposure to different indexes around the world while the former is just index in one part of the world.

- The VLS already has tracker exposure to the US market; it holds a US tracker, and a developed world ex-UK tracker which has a large US component. So it doesn't seem that you would be diversifying by buying more of the same. Of course, you could buy more of the same because you like the US, if that's what you wanty, and weight your exposure more towards the US and less towards the rest of the world. If so, I would suggest using a mid-cap or small-cap index as your already have plenty of exposure to the large-cap end of the scale.

- What 'good things' have you heard about America that will not already be in the price of American stocks? I cringe when people say they have 'heard good things' about [something very general like a particular part of the world (US), or a particular asset class (shares, or perhaps gold), or a specific company abc or company xyz].

Fashion investing is not the route to success. Following tips and buying something that you 'heard good things' about from a bloke down the pub is the route to losing your money. Either research it properly and buy it, or don't and don't. People 'heard good things' about buying dotcoms in 1999 and banks in 2007.. It was not pretty.

For my two pence (or two cents), the US markets are relatively more expensive than many other parts of the world right now. If you had held the US in a portfolio and it had gone up more than other regions you would be looking to sell some of it to rebalance to whatever had gone down, or gone up more slowly, rather than buying more of it. As you can pick up a lot of US exposure in a global largecap or midcap or smallcap tracker I wouldn't be piling in with another more focussed US tracker. Just IMHO of course.

JohnRo wrote: »

The problem seems to be that if you're sold on passive index tracking there aren't or don't appear to be very many choices at all for a regional small cap selection beyond ETFs so somewhat forced to go the vanguard route to obtain global smaller company exposure. Not that there is anything wrong with the fund imo.

Not quite sure I follow this sentence. If you are sold on passive index tracking presumably you are happy to use ETFs which allow you to follow indexes closely at low fees. If you want to use indexes to get exposure to regional small-caps (rather than global small caps) you can find plenty of these, from an S&P smallcap 600 to a Russell 2000 to an MSCI Brazil or China smallcap, or UK smallcap or Korea or Australia smallcap.

Is it just a question of cost, that you don't want to hold a bunch of regional smallcaps via ETFs because of the higher transaction costs if making frequent contributions to them? If so, I guess you could always buy less often. I haven't got any regional smallcap trackers because I generally think smaller companies is an area where regional active managers should be able to do well; I'm only using the global smallcap to get a bit of general global asset class exposure before thinking about which particular regions I like. I do occasionally use a UK 250 tracker.

You mentioned your Vanguard Global is ahead of the other managed regionals which are lagging - I expect it's because it's heavy in the top performing region recently being US. If US is 5-10% better than the other regions, then your UK and other regional smallcap actives can beat UK and other regional smallcap trackers by several percent and still lag behind a smallcap global tracker fund which has 40-50% in the US.

Obviously over time the US will not always do so well, so if you can find some star regional smallcap actives which have a good track record of beating regional smallcap passives in both up and down markets, they may be a better long-term choice. Obviously if you're sold on passive tracking as a concept, you might not want to even bother looking (given past performance is not necessarily etc etc etc).

gadgetmind

JohnRo wrote: »

The problem seems to be that if you're sold on passive index tracking there aren't or don't appear to be very many choices at all for a regional small cap selection

It's not a case of being "sold on" passive and more a case of having looking at the mountain of evidence for it being the best way for all but the most psychic to invest in markets that are "efficient".

How you then choose to tilt your portfolio towards areas that typically show slight out-performance is less important.

As it happens, I use both trackers and Investment Trusts for smaller companies, Asian, EM, etc. but only the latter for private equity.

bertpalmer

Hey folks, thanks for the views - appreciated. I had the impression that the VLS was weighted more towards the UK for some reason.

Yes, I have done very little research but I heard the advice from someone who works closely with risk in the financial sector.

I wasn't mad about the idea of small caps, only because my asian small cap fund has not performed well for some time - although I am in it for the long haul.

I will ponder some more!

gadgetmind

bowlhead99 wrote: »

You mentioned your Vanguard Global is ahead of the other managed regionals which are lagging - I expect it's because it's heavy in the top performing region recently being US.

That and it doesn't have the fee drag that causes active management to under-perform over the long term.

Obviously if you're sold on passive tracking as a concept, you might not want to even bother looking (given past performance is not necessarily etc etc etc).

I actually find passive tracking rather disturbing as a concept. Intuition tells us that an active manager should be able to avoid the potholes while collecting the magic coins, but when intuition and reality clash, what choice do we have but to change our position?

I cringe when people say they have 'heard good things' about [something very general like a particular part of the world (US), or a particular asset class (shares, or perhaps gold), or a specific company abc or company xyz].

I don't cringe but I do use mass enthusiasm about something as a valuable guide. Generally speaking, if too many people agree with me, I change my mind.

mark55man

gadgetmind wrote: »

..snip..

I don't cringe but I do use mass enthusiasm about something as a valuable guide. Generally speaking, if too many people agree with me, I change my mind.

You old contrarian !!

I am in 100% agreement - so you better watch out

JohnRo

gadgetmind wrote: »

It's not a case of being "sold on" passive and more a case of having looking at the mountain of evidence for it being the best way for all but the most psychic to invest in markets that are "efficient".

perhaps I need to learn to use a great many more words, that's exactly what I meant.

bowlhead99

bertpalmer wrote: »

Hey folks, thanks for the views - appreciated. I had the impression that the VLS was weighted more towards the UK for some reason.

You are right, it's weighted more to the UK than a pure global index, as it's marketed to UK investors who typically like more domestic exposure than the 10% or so that the UK represents out of all world equity markets.

The US market has the highest share of global market capitalisation so anything that includes a global developed ex-uk index is going to have a heavy US exposure, for better or worse.

The VLS is arguably a more balanced product because although it includes that global ex-uk tracker it also has various region-specific trackers (like the uk, us, europe, japan etc) which adjusts the portfolio away from simply investing in the largest economies by market size. Its mix of Japan vs US vs UK differs from a simple world index. Whether that adjustment is good or bad for you as an investor, depending on what if anything you also hold, in the long term, is unknown.

Having decided in what proportion the VLS wants to hold its individual indexes... within each of those indexes it's still investing in the largest companies by market size. Which it has to, to match the index it's tracking; the performance of a portfolio within a geographical market that does anything other than put most money into the biggest companies, will not deliver the same return as the index for that market. Just as described when talking about the choice of geographic split at the top level around the world, whether that divergence from the index will be good or bad is unknown.

If you follow the index with a low fee tracker you will get pretty much the same return as what you see on TV or in the paper. Psychologically that might be a good thing for you but whether that weighting of companies is desirable or not depends on whether the ones you're heaviest in, do the best or the worst or somewhere in between.

The S&P total market index, and the Vanguard fund tracking it, has 3-4000 companies in it. If you use an active manager who doesn't put 8% of his US portfolio into just Apple, Microsoft, Google, Exxon and Chevron, and those five companies all double without the other 4000 companies doing anything, the index will go up by 8% and your portfolio won't. But similarly your portfolio won't go down at all if they all halve and you don't have them, while the index will.

In efficient markets like US largecaps it's harder to beat "the markets" and Vanguard make their money by selling low fee funds investing by formulae rather than expensive research. Doesn't always hold for less efficient markets. Smallcaps would be one market I would describe as less efficient, but the quality and timeliness of information flows around small companies, together with reporting transparency etc is probably rather better in the US Russell 2000 than in China or Egypt or Timbuktu - and so the "efficient markets hypothesis" is more likely to hold true and active managers have arguably less to add.

takesyourchances

bowlhead99 wrote: »

IMHO, you need to decide what approach you want to take to each sector you're putting in your portfolio.

For smallcaps, if your approach is just buy lots of smallcap companies aroung the world weighted to their value, that's fine. If your approach is to pay more fees to an active manager to focus the global smallcap holdings into ones which they think will do better, that's fine. But it seems quite bizarre to decide that both are valid suggestions, so you'll do both. I mean, why not just find 200 funds that seem to be valid suggestions and weight them all at 0.5%. Man up and take a decision.

As mentioned elsewhere, I hold the global smallcap tracker alongside the LS fund to give me some general global exposure to smaller companies, in the same way I hold the LS to give me general global exposure to larger companies. Then I use satellite funds to modify the allocation as the mood takes me(e.g. by using regional specialist smallcap funds to give me greater exposure to Europe or Asia or UK or whatever, while skewing it away from US). Adding a global index smallcap fund as a satellite to a global active smallcap fund, or vice versa, wouldn't seem to make a lot of sense.

Thank you again for your detailed reply. Originally when looking for Global Small Cap coverage I was interested in the Vanguard Small Cap Tracker but could not add it on the HL platform earlier this year and was looking for the passive approach globally then to go with the passive VLS.

When I couldn't get the Vanguard Small Cap Tracker, I looked for a Global Managed Fund as I could not see a tracker available and went with the Standard Life Fund, which so far I am happy with how it has been going. It is 57 managed holdings.

I was thinking as the Vanguard Global Small Cap tracker can now be obtained on HL it would be a natural compliment to the VLS. I can see however the point of passive and managed together in the same sector.

Would I be right in saying these two would do different things although the same sector? As in the Vanguard Global Small Cap would index track such a wide spread of several thousand Global Small Companies like the VLS index tracks several thousand large Companies and the managed fund is more niche picks and small with only 57 holdings so far?

Agree need to man up and decide on an approach in a sector and also I am procrastinating on a few directions

What you said here is really what I am trying to do overall.

As mentioned elsewhere, I hold the global smallcap tracker alongside the LS fund to give me some general global exposure to smaller companies, in the same way I hold the LS to give me general global exposure to larger companies. Then I use satellite funds to modify the allocation

Overall my portfolio approach is majority passive with the core VLS which I prefer for a large overall percent with the edges managed and some niche pickings and focus areas.

When I was thinking of the Vamgaurd Global Small Cap tracker I was thinking a 10% holding and the VLS core 65% so that would be 75% in the passive approach with the 5 managed funds sharing the 25% left between them, one of which is the Standard Life Global Small Cap fund at 5%.

It goes back to my bit above would the wide spread tracker passive approach at a larger holding of a few thousand tracked smaller companies complement the VLS while the Global Small Cap holding of 57 managed companies at 5% in the portfolio work in together. If this makes sense

I am not sure on European Small Cap at the moment although the Threadneedle fund looked interesting and could think of this again. The other idea on the back burner is UK Small Cap as the SL Global managed fund has 16% UK and it could round off my managed Small Cap funds that I have which includes Asia and Japan.

That is another angle of approach maybe and could cover a couple of more small cap sectors managed sharing that 10% and divide the spread, UK maybe even Europe.

Thanks again for your input and any other comments on this.

bowlhead99

takesyourchances wrote: »

Thank you again for your detailed reply. Originally when looking for Global Small Cap coverage I was interested in the Vanguard Small Cap Tracker but could not add it on the HL platform earlier this year and was looking for the passive approach globally then to go with the passive VLS.

When I couldn't get the Vanguard Small Cap Tracker, I looked for a Global Managed Fund as I could not see a tracker available and went with the Standard Life Fund, which so far I am happy with how it has been going. It is 57 managed holdings.

I would hope you would be happy with it as it has made a great percentage over a year and outperformed the tracker over 3 months, 6 months, 12 months. But you have held it in a rising market ; would they have outperformed or underperformed in a falling market?

I was thinking as the Vanguard Global Small Cap tracker can now be obtained on HL it would be a natural compliment to the VLS. I can see however the point of passive and managed together in the same sector.

Why can you see the point of passive and managed together in the same sector? Other than each of them could make money and you can't decide which way to go? You will end up with a pound in each of a thousand funds at that rate.

No offence intended, but you are a young newbie investor who has not been in the game long. A lot of funds you like the sound of, looks interesting, am tempted by, etc. This is fine because a lot of them do indeed look fine and could make money. But there is a limit to how much value you can get by listening to others about what they would buy. There is no silver bullet solution that just makes you a perfect portfolio. Clearly £100m+ worth of people think each of the two funds (Vanguard global smallcap and SL global smallcap) are useful, but most will not hold both.

SLI think they can get a better return by investing in their favourite 57 opportunities and that people will pay for that, and they do. Vanguard think people will pay to passively hold trackers, and they do. You think a global smallcap fund can complement a global largecap fund, which it can. But for me, you haven't explained why you think a global active smallcap fund will complement a global passive smallcap fund.

The careful focus on the 57 companies will either drag up the performance of the diversified basket of 4200 because they're good picks over a particular time period, or it will drag them down. And similarly, by using two funds together the performance of the 4200 dilutes the profits or the losses of the 57. If you don't think the 57 will get as good global exposure as the 4200 or perform better than 4200, why pick them at all? If you do think that the 57 will do better than the average of the others over the next year like it did over the last, why buy the other 4143 at all?

Sure, you might say it might be better or worse or it might not so you'll buy both.... May I introduce you to F&Cs global smallcap, or the Inv Perp one? They also might get better or worse returns than SLI or Vanguard- why not buy those too and really hedge your bets further. And so on. This is a game you don't really win more by buying more funds in the same sector. Find one that is satisfactory and buy it. If you buy lots of funds that are doing the same things (i.e. constructing a portfolio of smallcap equities around the globe) you will only be storing up a costly headache for when you want to transfer all your holdings to another platform when the platforms shake up their pricing to reflect the admin costs of holding more funds.

Would I be right in saying these two would do different things although the same sector? As in the Vanguard Global Small Cap would index track such a wide spread of several thousand Global Small Companies like the VLS index tracks several thousand large Companies and the managed fund is more niche picks and small with only 57 holdings so far?

They will produce different results but they are both trying to do the same thing: give their investors a global portfolio of smallcaps - because they know some people are going to want a dedicated smallcap fund with international exposure. SLI's intention is to deliver a return that people want to contine to pay for. Vanguard's is to deliver the index result well enough at low enough cost that people will buy it rather than look for a rival whose results might be worth paying for.

gadgetmind

bowlhead99 wrote: »

Why can you see the point of passive and managed together in the same sector?

The passive will reduce your fees while the active will still give you the excitement of seeing how long it is before the "outperforming" fund you carefully chose 1) features in BestInvest's "Spot the dog", 2) Changes its investment strategy, 3) Dumps its manager, 4) Changes name, 5) Is quietly closed.