Mixing Vanguard Life Strategy funds?

bowlhead99

Crashy_Time wrote: »

1) To your first point, yes maybe, but if the OP buys three different LS funds at the same time (as I took them to mean?) they pay three times the fees for essentially the same or similar underlying funds.

The fees for the three funds in which the OP is considering investing are levied on a percentage of assets basis.

If fund A (lifestrategy 60) has ongoing charges of 0.22% per annum and fund B (lifestrategy 80) has ongoing charges of 0.22% per annum, while fund C (lifestrategy 100) has ongoing charges of 0.22% per annum.

It doesn't matter if you
1) put £10,000 into A and nothing into B or C; or
2) put £5000 into B and £5000 into C and ignore A entirely; or
3) perhaps put £3334 into A with £3333 into each of B and C

Either way, you have £10,000 under management with vanguard and the ongoing fund charges are £22 per year on the aggregate £1000 invested. Method (3), the three way split, does not cost 'three times the fees' as method (1), all in one fund.

Your implication was that it would cost him 0.66% if he bought three funds, which is clearly not the case... it's still 0.22% of management fee and running cost whether you split the assets 3 ways or one way

FWIW he mentioned he's using vanguard's own platform which also (just like the OCF from the fund itself) charges on a percent of assets basis for its platform services, not based on the quantity of holdings in your portfolio.

Better to decide on the overall % of your money that you want to hold in various sectors/funds and buy one cheap fund that covers each area, re-balancing when necessary IMO.

The Vanguard lifestrategy series of funds-of-funds do that. In other words they buy a cheap fund that covers each area to which they think their investors might like to be exposed (typically 10+ funds for the various equity regions and bond types/regions) and periodically rebalance.

A user of such funds can buy one or more of the lifestrategy funds to get the level of equity/bond split that they desire, knowing the equities will be 25% UK-listed and 75% non-UK listed. Whether the investor uses one or two or three Vanguard funds to achieve their split, the running costs will be the same.

To me having UK equity exposure in a pension, AND also being heavy UK equity in a portfolio you run yourself for example is "Over-concentrated" (unless you have decided that the % invested in the pension of your overall investment pot is too small)

The OP didn't mention having any pension provision at all - though we can assume he has some and that it has some UK allocation because any sensible pension would. He was only talking about these fund investments. Still, the 'heavy UK equity' to which you refer is 25% of the Vanguard LifeStrategy equities held whether you use the VLS 100 or VLS60 to get the equities or a combination of the two; both products have 25% of their equities be UK-listed companies.

The "Perfect Level" of concentration is to be diversified in the way that you have hopefully thought about before investing IMO.

If he had thought about what allocation he wanted before investing - but now thinks that on balance, he doesn't want that allocation after all, then that initial allocation could perhaps be disregarded.

If what he does want is to have 25% of his equities be UK listed equities and allocated according to the UK index, he won't break that allocation by buying another VLS fund, because they all put the same proportion of their equities in UK listed companies Vs overseas listed. Where they differ is their proportion of bonds held.

Also very unlikely that you could beat the LS costs by buying "10-15 trackers", maybe you could give an example?

Sure, here are the steps involved:

1) Open the factsheet for one of the lifestrategy funds, as you encouraged the OP to do. For example VLS80% equity.

2) Observe that the ongoing charges for the lifestrategy product is 0.22% per year.

3) Write down the names and proportions of the underlying Vanguard tracker funds that are held by the lifestrategy fund.

4) Look up the ongoing charges of those individual 10-15 funds by referring to their own published charges

5) Multiply the charges by their weights within the lifestrategy portfolio to obtain a blended average cost of holding those 10-15 funds directly

6) Observe that the blended average cost of those 10+ funds held in the proportion in which VLS hold them, is lower than the 0.22% found in (2) above

2) So you think people shouldn`t read about/study investment areas they know very little about, and you also seem to think that someone else (me? you?) on the internet could hint at a "definitive answer"? about future outcomes for bonds/other investments? Maybe I misunderstood your point? To the OP I would say definitely DYOR, and read...a lot.

I agree he should read up on asset allocation and markets, but 'why not read up about how the prospects for bonds are not as good as what they once were' will not tell him what to hold; they are not useless, so the amount to hold isn't going to be zero percent, and he will just learn that there are a range of views for the optimal allocation; he knows that.

3) Capital loss on UK Gov. bonds? Has this happened to you?

Pretty much every UK gov bond trades on the open market at a price exceeding £100 for every £100 of value at maturity. With the exception of the really short term 0.5% bonds maturing in mid 2022 (which cost £99.9 plus bid-offer spread for each £100 of nominal, and make up a tiny proportion of the overall UK gilts index) all the other ones cost £100.50 or more. The gilts giving £4 coupon per year and maturing at £100 in 2040 would cost you £193 today. You might be able to sell them at £200+ if interest rates fall further. Or more likely you would sell them for less than £193, getting a capital loss.

You presumably know this which is why you made the recommendation that the OP do his research and consider that "the prevailing idea that they are no longer such a good investment" could be true.

Crashy_Time

bowlhead99 wrote: »

The fees for the three funds in which the OP is considering investing are levied on a percentage of assets basis.

If fund A (lifestrategy 60) has ongoing charges of 0.22% per annum and fund B (lifestrategy 80) has ongoing charges of 0.22% per annum, while fund C (lifestrategy 100) has ongoing charges of 0.22% per annum.

It doesn't matter if you
1) put £10,000 into A and nothing into B or C; or
2) put £5000 into B and £5000 into C and ignore A entirely; or
3) perhaps put £3334 into A with £3333 into each of B and C

Either way, you have £10,000 under management with vanguard and the ongoing fund charges are £22 per year on the aggregate £1000 invested. Method (3), the three way split, does not cost 'three times the fees' as method (1), all in one fund.

Your implication was that it would cost him 0.66% if he bought three funds, which is clearly not the case... it's still 0.22% of management fee and running cost whether you split the assets 3 ways or one way

FWIW he mentioned he's using vanguard's own platform which also (just like the OCF from the fund itself) charges on a percent of assets basis for its platform services, not based on the quantity of holdings in your portfolio.
The Vanguard lifestrategy series of funds-of-funds do that. In other words they buy a cheap fund that covers each area to which they think their investors might like to be exposed (typically 10+ funds for the various equity regions and bond types/regions) and periodically rebalance.

A user of such funds can buy one or more of the lifestrategy funds to get the level of equity/bond split that they desire, knowing the equities will be 25% UK-listed and 75% non-UK listed. Whether the investor uses one or two or three Vanguard funds to achieve their split, the running costs will be the same.

The OP didn't mention having any pension provision at all - though we can assume he has some and that it has some UK allocation because any sensible pension would. He was only talking about these fund investments. Still, the 'heavy UK equity' to which you refer is 25% of the Vanguard LifeStrategy equities held whether you use the VLS 100 or VLS60 to get the equities or a combination of the two; both products have 25% of their equities be UK-listed companies.


If he had thought about what allocation he wanted before investing - but now thinks that on balance, he doesn't want that allocation after all, then that initial allocation could perhaps be disregarded.

If what he does want is to have 25% of his equities be UK listed equities and allocated according to the UK index, he won't break that allocation by buying another VLS fund, because they all put the same proportion of their equities in UK listed companies Vs overseas listed. Where they differ is their proportion of bonds held.


Sure, here are the steps involved:

1) Open the factsheet for one of the lifestrategy funds, as you encouraged the OP to do. For example VLS80% equity.

2) Observe that the ongoing charges for the lifestrategy product is 0.22% per year.

3) Write down the names and proportions of the underlying Vanguard tracker funds that are held by the lifestrategy fund.

4) Look up the ongoing charges of those individual 10-15 funds by referring to their own published charges

5) Multiply the charges by their weights within the lifestrategy portfolio to obtain a blended average cost of holding those 10-15 funds directly

6) Observe that the blended average cost of those 10+ funds held in the proportion in which VLS hold them, is lower than the 0.22% found in (2) above


I agree he should read up on asset allocation and markets, but 'why not read up about how the prospects for bonds are not as good as what they once were' will not tell him what to hold; they are not useless, so the amount to hold isn't going to be zero percent, and he will just learn that there are a range of views for the optimal allocation; he knows that.


Pretty much every UK gov bond trades on the open market at a price exceeding £100 for every £100 of value at maturity. With the exception of the really short term 0.5% bonds maturing in mid 2022 (which cost £99.9 plus bid-offer spread for each £100 of nominal, and make up a tiny proportion of the overall UK gilts index) all the other ones cost £100.50 or more. The gilts giving £4 coupon per year and maturing at £100 in 2040 would cost you £193 today. You might be able to sell them at £200+ if interest rates fall further. Or more likely you would sell them for less than £193, getting a capital loss.

You presumably know this which is why you made the recommendation that the OP do his research and consider that "the prevailing idea that they are no longer such a good investment" could be true.

1) Ok, split your investment and the fees average out, but how about if you buy all the LS funds (or even just the one`s you mention) and keep adding to them as many investors do, you are then just buying more of the same underlying funds and therefore over-concentrated in two basic types of investment? I think it is better to think about how much or even if you want bonds at all and pick a sensible split depending on your age and risk appetite, and buy just one fund to cover this (Or two funds - Cheap global equity tracker and Gov bond fund of your choice)

2) Your DIY tracker idea just isn`t practical or desirable for most people investing for themselves IMO, and the slightly higher fund fees for the oven ready version just reflect this - would minimum trading/investment limits even make this possible on many platforms?

3) I didn`t mean to read only about dire predictions for bonds (no way we can predict what will happen in future anyway) but just general reading before investing to get a feel for it, in the way that your example on maturities gives predictions of some possible outcomes. However we must agree that the risk associated with UK Gov. bonds is much lower than equities or some of the many other investments that the OP could get involved in?

sebtomato

I think the DIY approach to building our own LifeStrategy fund (investing in the underlying funds in the same proportion) may save slightly on the fund management fee (for instance, 0.14% instead of the 0.22% for the FS fund).

However, there are some other considerations too: some of the underlying funds may pay interests instead of dividends, while the LS funds pay dividends. For many people, taxation on dividends is better than taxation on interests (because of allowance and lower rates).

Crashy_Time

sebtomato wrote: »

I think the DIY approach to building our own LifeStrategy fund (investing in the underlying funds in the same proportion) may save slightly on the fund management fee (for instance, 0.14% instead of the 0.22% for the FS fund).

However, there are some other considerations too: some of the underlying funds may pay interests instead of dividends, while the LS funds pay dividends. For many people, taxation on dividends is better than taxation on interests (because of allowance and lower rates).

Good point, maybe you just need to use up the ISA limit for the DIY approach (also for the LS approach) and invest elsewhere with more of an eye on tax?

sebtomato

Crashy_Time wrote: »

Good point, maybe you just need to use up the ISA limit for the DIY approach (also for the LS approach) and invest elsewhere with more of an eye on tax?

My point was: if you are going to invest outside of a tax wrapper (e.g. ISA), then investing in a LifeStrategy 40 or LS60 Vanguard fund might be more tax efficient than investing in the underlying funds, because LS40 or LS60 would pay dividends on the whole invested amount, as opposed to interests (more taxed for many people).

Unfortunately, the LS20 fund is paying interests...

Crashy_Time

sebtomato wrote: »

My point was: if you are going to invest outside of a tax wrapper (e.g. ISA), then investing in a LifeStrategy 40 or LS60 Vanguard fund might be more tax efficient than investing in the underlying funds, because LS40 or LS60 would pay dividends on the whole invested amount, as opposed to interests (more taxed for many people).

Unfortunately, the LS20 fund is paying interests...

The only LS fund that is all dividends is the LS 100? Interesting points though, something to think about.

bowlhead99

Crashy_Time wrote: »

The only LS fund that is all dividends is the LS 100? Interesting points though, something to think about.

The LS100's income is all dividends and pays all its net income out as dividends

The LS40, 60 and 80's income is a mixture of interest and dividends. As they're unable to say that over 60% of their assets throughout the year will be interest-generating, they simply pay all their net income out as dividends.

The LS20's income is a mixture of interest and dividends but most of its income-producing assets are interest paying (sufficiently over the threshold for it to characterise its distributions as interest). So it pays out all its net income as interest.

The 40,60,80 funds will be slightly less tax efficient than the 20 and 100, as they'll receive some taxable interest income within their total interest income, but won't be able to claim their investor distributions as tax deductible interest payments, so will have a few million pounds as a UK corporation tax bill. This is unwelcome but not a massive proportion of their net assets, and is an issue common to other rival mixed asset funds with those asset allocation ratios; so many investors are happy to suck it up rather than have the hassle of investing more directly into the underlying funds themselves.

Some of those investors will welcome the avoidance of interest income when using a LS 40,60,80 product, because they would pay higher personal income tax rates on it than they pay in total on the dividends they receive plus what the fund pays internally on its interest income. Others don't see that avoidance of personal interest income as a major coup because they are using an ISA or pension to do their investing anyway; they are simply using the mixed asset product for an easy life and don't mind a little extra cost exposure.

Crashy_Time wrote:

2) Your DIY tracker idea just isn`t practical or desirable for most people investing for themselves IMO, and the slightly higher fund fees for the oven ready version just reflect this

I am not saying it is particularly practical or desirable to hold all the underlying funds oneself when you can simply buy that 'oven ready version' with only a slightly higher level of fees and internal tax.

It was not my DIY tracker or "Idea" that I am trying to sell, recommend or promote.

I was only mentioning it because when the OP had said that he used lifestrategy and wondered whether the costs were more than necessary for the same portfolio of equity and bonds, your response was that he should, "decide on the overall % of your money that you want to hold in various sectors/funds and buy one cheap fund that covers each area, re-balancing when necessary IMO."

I noted that holding a cheap fund that covered each area, rebalancing where necessary, was exactly what the VLS funds did, holding say 10-15 funds to cover the various areas and rebalancing as they went. I observed that it the multi asset fund of funds solution was a reasonable approach, though had mentioned it was a little more expensive than buying the component funds yourself and being hands-on.

My proof/walkthrough of using direct fund holdings to reduce costs exposure from the mixed asset fund-of-funds product was simply a reply to your suggestion that it was, "very unlikely that you could beat the LS costs by buying "10-15 trackers", could you give an example". So I did give the example. I didn't initially bother to mention the additional boring tax points as additional cost exposure that could be avoided by buying the underlying (or by building your own mix of 100 and 20 which don't create corporation tax exposure), as different people have different tax preferences.

But the fact that I'm explaining things for education purposes doesn't mean I think OP should build a portfolio of trackers when he can just buy a mixed asset fund of funds (or two, or three) off the shelf.

Crashy_Time

Ok, very interesting thoughts and perspectives from BH99 and everyone else, I`m definitely enjoying and learning from this thread. Thanks guys.

schiff

bowlhead99 wrote: »

You seem to misunderstand the concept of how accumulation funds work? You don't get any extra 'units'with an accumulating fund, and if you have a distributing find you don't get any more real 'value' by buying in a day earlier before the ex div date.

Some years ago I was pumping money into a High Yield Fund protected by a S&S ISA. It paid out quarterly interest. It didn't take me long to see that if I bought immediately after it went ex-dividend and forwent (never used that word in my life before!) the quarterly dividend, I was acquiring units at a reduced price and getting the quarterly interest on the new units for as long as I held the investment. It seemed a no-brainer

bowlhead99

schiff wrote: »

Some years ago I was pumping money into a High Yield Fund protected by a S&S ISA. It paid out quarterly interest. It didn't take me long to see that if I bought immediately after it went ex-dividend and forwent (never used that word in my life before!) the quarterly dividend, I was acquiring units at a reduced price and getting the quarterly interest on the new units for as long as I held the investment. It seemed a no-brainer

Smart thing to do if you want to generate an income without triggering the obligation to pay income tax on the income - just buy right after ex-div and sell right before the next one and you benefit from the income coming into the fund without it being sent out to you. A little wacky if you are doing it in a tax wrapper where you won't pay income tax on the income anyway