Comparing VLS with L&G's equivalent Multi Index?

Not_Me_Officer

Going to try & keep this one brief. So there's the VLS range: 20/40/60/80/100 equities:bonds.

Now if i look at the VLS 80 i would say the L&G MI 6 would be the L&G equivalent. Looking an international & UK equities in terms of % it's 76% vs 70% so similar.

So to 'drop down' a tier looking at the VLS 60 i would think the L&G MI 5 would be its equivalent. VLS coming at 57% so close enough to 60 but the L&G coming at 48%. 48 is closer to 40 than it is 60.

So is the LG MI6 the L&G equivalent of the VLS60, have i understood it properly?

grandst

The FE risk score on trustnet is useful for comparing the volatility of funds.

bowlhead99

The funds take different approaches.

One (L&G MI) aims to deliver you a level of risk on scale of 1 to 8 and will modify the portfolio holdings to keep you on that target as different asset classes change their volatility at different stages in an economic cycle.

The other (V LS) aims to deliver you whatever level of performance you get from x% in the global equities markets [with a quarter at home and three quarters away], and 100-x% in the bond markets.

So, the first is risk focused and the second is performance targeted. Saying "which one from provider A is the same as what one from provider B" is implying the approaches are interchangeable, which when you think of it, they are not really.

Not_Me_Officer

I understand what you're saying but then why when you google alternatives to VLS, L&G MI are one of those mentioned (BlackRock Consensus if i remember the name right is another mentioned)?

If they were completely nothing alike then surely absolutely anything & everything that you could possibly invest in would also be an alternative and would also be mentioned? So are they not in a way similar?

So if you were happy with let's say the VLS20 risk approach but nothing higher, you wouldn't jump in on the L&G MI 6 would you, or 5 etc?

I was reading old posts & saw yourself link the VLS80 with i think it was the L&G MI 6. Now i'm not saying you were putting forward that it was L&Gs version of the VLS80 but for you to mention it in the same breath it must be somewhat comparable?

So i was just looking at a comparison to the VLS60 & thought it might've been the L&G5 but wasn't sure.

Malthusian

bowlhead99 wrote: »

One (L&G MI) aims to deliver you a level of risk on scale of 1 to 8 and will modify the portfolio holdings to keep you on that target as different asset classes change their volatility at different stages in an economic cycle.

Well this is a first, I get to correct Bowlhead The Multi-Index funds are numbered 3-7 after Distribution Technology's risk scale, which is from 1 to 10. They have a document which shows you how the funds are supposed to map onto other risk scales.

The reason there isn't an MI 1 or 2 is because there would be little demand for or point in index funds which invested entirely in cash. And there isn't an MI 8, 9 or 10 because investors who are that high up on the risk scale tend to want bespoke portfolios.

The question for the OP is what he wants. Have you risk profiled yourself as a 6 out of 10 investor and decided that you want Legal & General to decide a suitable asset allocation for that risk profile? Or have you decided to pick the asset allocation between equities and bonds yourself while leaving the rest to Vanguard?

Malthusian

Not_Me_Officer wrote: »

I understand what you're saying but then why when you google alternatives to VLS, L&G MI are one of those mentioned (BlackRock Consensus if i remember the name right is another mentioned)?

Because Vanguard is the forum's favourite for people who want to start investing in equities and L&G is the forum's second favourite for people who want to start investing in equities but want an alternative to Vanguard. There is not really anything more to it than that.

If they were completely nothing alike then surely absolutely anything & everything that you could possibly invest in would also be an alternative and would also be mentioned?

What would be the point of that? People don't come here because they want us to give them a list of absolutely anything & everything they could invest in. People come here because they want simple solutions and Vanguard LifeStrategy is the forum favourite simple solution. L&G Multi Index is the second favourite simple solution.

Hundreds of funds will have an asset allocation that looks vaguely similar to Vanguard's 60/40. Any number of funds in the Investment Association's Mixed Investment (40-85%) category will have something close to 60% in equities and 40% in fixed interest, probably a number in the Absolute Return sector as well. That does not mean that, say, Fidelity MoneyBuilder Balanced is the equivalent of Vanguard 60/40 or L&G Multi-Index 6. It is a different fund with different objectives that happens to have a similar asset allocation at this particular moment in time.

TheTracker

Malthusian wrote: »

Well this is a first, I get to correct Bowlhead The Multi-Index funds are numbered 3-7 after Distribution Technology's risk scale, which is from 1 to 10. They have a document which shows you how the funds are supposed to map onto other risk scales.

The reason there isn't an MI 1 or 2 is because there would be little demand for or point in index funds which invested entirely in cash. And there isn't an MI 8, 9 or 10 because investors who are that high up on the risk scale tend to want bespoke portfolios.

The question for the OP is what he wants. Have you risk profiled yourself as a 6 out of 10 investor and decided that you want Legal & General to decide a suitable asset allocation for that risk profile? Or have you decided to pick the asset allocation between equities and bonds yourself while leaving the rest to Vanguard?

This is exactly right. I've seen some of the IFA-spiked koolaid on this forum around they being such different approaches, but risk and performance are so related, almost inversely, that they are practically the same in that aspect.

The key difference is marketing. I would describe it this way.

Passive multi-asset funds have in common that they make fund allocations based on rigorous scientific analysis of the fundamental behaviour of markets over short and long periods. Multi-asset products are suitable for most risk levels. They are usually fettered funds of funds (all constituent funds are from the same house).

- Vanguard LS markets its products based on the % of equity in the fund. These map to risk levels. The implication is they are less likely to change the internal %'s, but actual risk level may vary slightly. It's likely your risk appetite will change over time, so be sure to manage this yourself by mixing products.

- Others like L&G market their products based on the risk score (out of ten). These map to % allocations. The implication is they may be more likely to vary %'s to maintain the risk level, but this also means a higher chance for the fund manager to make active decisions. It's likely your risk appetite will change over time, so be sure to manage this yourself by mixing products.

- Some are marketed targeted to a Retirement Date. It's likely your risk appetite will change over time, so these funds try to manage it for you. Unfortunately, everyone's risk appetite glide path isn't the same, so be sure you review your position regularly.

More crudely, vanguard have you put your faith in long term market analysis and the chance of them fiddling the %'s occasionally, at the risk the market analysis doesn't hold true going forward. L&G target people who feel thats a little too restrictive, at the cost of turning off people who are more resistant to the thought of manager making frequent active decisions about how to allocate amongst passive funds. IMHO these are minor differences that market teams drive wedges in - if you'd be happy with one you'd be happy with the other.

I've also seen recent criticism on this forum of 'if vanguard (or whoever) think home bias is negative, then why do they sell their flagship product with home bias?". Well, this is simply consumer-led rather than product-led marketing. Education over time might shrink the differential. BTW this is really well described in the great podcast/radio show 50 things that shaped the economy, see http://www.bbc.co.uk/programmes/w3csv3gm

bowlhead99

Malthusian wrote: »

Well this is a first, I get to correct Bowlhead The Multi-Index funds are numbered 3-7 after Distribution Technology's risk scale, which is from 1 to 10. They have a document which shows you how the funds are supposed to map onto other risk scales.

hehe yes you are right. Writing the response from a phone I couldn't be bothered to go check what the DT scale actually went up to, other than it went higher than they bother to create funds for, through lack of demand - the point is the same really - it's just a scale so you can decide what product from their range to take after you have read the prospectus and understood what they are trying to do with the funds and how.

Not_Me_Officer wrote: »

I understand what you're saying but then why when you google alternatives to VLS, L&G MI are one of those mentioned (BlackRock Consensus if i remember the name right is another mentioned)?

If they were completely nothing alike then surely absolutely anything & everything that you could possibly invest in would also be an alternative and would also be mentioned? So are they not in a way similar?

Don't get me wrong, yes they are alternatives / rivals because they are both globally diversified multi-asset funds, principally built on indexes (though L&GMI also holds direct property fund), and offer a range of asset mixes from more aggressive to more conservative.

The point is just that they are tackling the problem in a different way; one of them has an approach which will vary the equity vs non-equity component and the home/away mix based on what the actuaries and statisticians tell them should achieve a certain risk band, and the other doesn't. So you can't necessarily say this one from provider A can be directly flipped out and swapped for this one from provider B because then you are changing the way you are approaching the problem. Both methods could be legitimate ways of approaching the problem, yes. But they are not quite the same.

So i was just looking at a comparison to the VLS60 & thought it might've been the L&G5 but wasn't sure.

For example if you know you are a medium risk investor you might pick LG MI5 - it's the most 'in the middle' one of their range from 3 to 7. For VLS, you can see that the most 'in the middle' one of their range that they choose to offer is '60', as they go 20/40/60/80/100. But the scales are different because at the top end LGMI7 is generally not going to be 100% equity; and Vanguard's equities in their 60 or even their lower-risk 40 is still only 25% home / 75% overseas so US is its biggest equity region while LG's is probably going to be UK (haven't checked).

Maybe a 'medium risk' investor from LG's perspective who is happy for the fund manager to tweak the equity / bond / property and home / away mix to stay in a 'zone' of volatility is not going to be happy with Vanguard which has a completely static equity bond mix and high foreign / US component ; VLS60 has done 33% in 3 years and if you think of it being the other way around and losing 30% of your money instead, someone who said they were only medium on LG's scale possibly would prefer more caution.

But the scales are different and Vanguard doesn't offer a VLS 41 and VLS 42, 43.etc ... 58,59,60. And even if they did there is no one number that exactly matches what L&G offer because they are delivering a static performance target and L&G will change the mix.

I was reading old posts & saw yourself link the VLS80 with i think it was the L&G MI 6. Now i'm not saying you were putting forward that it was L&Gs version of the VLS80 but for you to mention it in the same breath it must be somewhat comparable?

Yes it is 'somewhat' comparable. Vanguard offer something higher than 80 and L&G offer something higher than 6. I think V80, which is quite an aggressive fixed equity component with high overseas equity /currency exposure might be closer to LG7 than LG6 really. But I haven't looked at it in the last few months and don't have the figures to hand or in my head.

In my post above I am not saying you can't compare them - just that you don't need to compare them as they are not really direct replacements for each other. You look at each of the product ranges and see if they work for you, and if it does work, you decide which product from that product range you want. But if you are hopping from one product range to the other you are probably changing your approach - so, you can just start again and decide which product from that new range, that new strategy / philosophy, you want.

For example say you are investing 100k,and 60k of it is going to be in this multi asset vehicle and another 40k in other choices. If for some reason you were of the opinion that you wanted a hyper-specific level of overall equity to non equity, like 65% overall, then you could use a vanguard product with fixed ratios to help you achieve that and just focus on creating the ratio on your other assets to get to the target aggregate level of equities. But you couldn't do that if you used LG5 as your core because you don't know what exact ratio of equity / nonequity LG5 is going to give you from month to month. It would perhaps be a different mindset to use one product vs the other as your 'multi-asset' core.

Audaxer

bowlhead99 wrote: »

The point is just that they are tackling the problem in a different way; one of them has an approach which will vary the equity vs non-equity component and the home/away mix based on what the actuaries and statisticians tell them should achieve a certain risk band, and the other doesn't.

That's interesting bowlhead - as VLS funds have fixed allocations, does that mean that if you have for example a VLS60, the risk level of the fund will vary a bit depending on market conditions and other factors? If so that is a bit of a surprise as I'm sure the VLS funds' factsheets specify fixed risk levels.

If the L&G Multi Index method of varying the equity v. non-equity component and the home/away mix is the best method to keep to a risk level, I am not sure how investors with large portfolios of single sector funds are able to rebalance this way. I just assumed they would rebalance their portfolios back to 60/40 equities to bonds, or whatever their original allocation was. So am I right in thinking that single sector investors would just be rebalancing in a similar way to VLS rather than the L&G method?

Malthusian

Audaxer wrote: »

That's interesting bowlhead - as VLS funds have fixed allocations, does that mean that if you have for example a VLS60, the risk level of the fund will vary a bit depending on market conditions and other factors? If so that is a bit of a surprise as I'm sure the VLS funds' factsheets specify fixed risk levels.

Risk level is generally measured as the standard deviation of returns. The standard deviation of returns is, like returns itself, a backward-looking measure of past performance. So clearly the "risk level" will vary continuously depending on the performance of bonds and equities over the given time period.

You'll need to be more specific about which part of the factsheet you mean. If you mean the 1-7 scale on the Key Investor Information Document, this is basically the standard deviation, only distilled into a less meaningful form. Vanguard are obliged to include it, as is every fund manager in the EU. If we see a big crash or a big rise in the markets Vanguard may have to change its KIID so the risk indicator says 5 or 6 instead of 4. What does that mean for investors? Not a lot.

If the L&G Multi Index method of varying the equity v. non-equity component and the home/away mix is the best method to keep to a risk level, I am not sure how investors with large portfolios of single sector funds are able to rebalance this way.

It's fairly straightforward to do, depending on how scientific you want to be. First you work out what your portfolio should look like, i.e. adjusting, for example, equities downwards and bonds upwards, until you have an asset allocation that produces the desired risk level. Then you switch out of the sectors in which you have too much and into the ones in which you have too little.

Whether it is a good idea to switch in this way or not just because the standard deviation of returns is at the "wrong" level is another matter.

grey_gym_sock

Malthusian wrote: »

Whether it is a good idea to switch in this way or not just because the standard deviation of returns is at the "wrong" level is another matter.

indeed.

my first thought is that i'd rather not be risk-targeting, because "risk" (i.e. volatility) is likely to rise after a market crash, which would make me reduce my percentage in equities at that moment (in order to maintain a constant "risk" level). and hence i might partly miss out if/when equities bounce back.