Vanguard Life Strategy OCF

Blossom656

Hi.
I'm relatively new to investing and have what is maybe a stupid question.
I have been trying to create a balanced portfolio using a number of index funds - UK equities, Global Equities, Gilts and so on and largely selecting funds with the lowest OCF.
The Vanguard Lifestyle funds look like a good alternative strategy to achieve the same thing and the OCF doesn't look too bad. But I'm wondering if this is an OCF on top of an OCF, if that makes sense? So basically the lifestyle funds invest in a number of index funds, which have various OCFs. Is the lifestyle OCF on top or is that everything? I'm not explaining this very well, but say all the constituent funds had an OCF of 0.2% and the lifestyle fund has an OCF of 0.22%. Does this mean it only costs 0.02% more than buying all the funds in those proportions and rebalancing yourself, or is it 0.22% more expensive?
Hope I've made some sense and sorry if it's a stupid question.

Linton

The OCF of a fund of funds is just as stated, it is not an addition tob the individual OCFs for the underlying funds

ColdIron

You just pay the single OCF of 0.22% on the Lifestrategy range

lindabea

Conversely, if you were to invest in the underlying funds, you will pay the OCF for EACH of the funds you select to invest.  As in your example, it will be 0.2% for each fund selected - not just 0.2% which you seem to think when making your comparison!!  A big saving by choosing the Lifestrategy fund rather than making it up yourself

Albermarle

lindabea said:

Conversely, if you were to invest in the underlying funds, you will pay the OCF for EACH of the funds you select to invest.  As in your example, it will be 0.2% for each fund selected - not just 0.2% which you seem to think when making your comparison!!  A big saving by choosing the Lifestrategy fund rather than making it up yourself

I an afraid this is bad maths .eg
Index fund  A - £1000 at 0.2% = £2 charge 
Index fund B - £2000 at 0.2% = £4
Index fund C - £8000 at 0.2% = £16
Total charge for £11000 = £22 ( 0.2% amazingly ) 

Blossom656

lindabea said:

Conversely, if you were to invest in the underlying funds, you will pay the OCF for EACH of the funds you select to invest.  As in your example, it will be 0.2% for each fund selected - not just 0.2% which you seem to think when making your comparison!!  A big saving by choosing the Lifestrategy fund rather than making it up yourself

Yes, I do think it's just 0.2%. They are percentages. So 0.2% on each is exactly the same as 0.2% on the whole lot.

dunstonh

The VLS funds are more expensive than holding the underlying funds directly.  However, if you hold the underlying funds directly, you would have to rebalance and adjust them.   The extra cost with VLS is to pay for them to do that.

Blossom656

dunstonh said:

The VLS funds are more expensive than holding the underlying funds directly.  However, if you hold the underlying funds directly, you would have to rebalance and adjust them.   The extra cost with VLS is to pay for them to do that.

Thanks. Yes, I realised that. The bit I was trying to work out is exactly how much more expensive it was, so I could work out whether it's worth doing it myself. 

dunstonh

Blossom656 said:

dunstonh said:

The VLS funds are more expensive than holding the underlying funds directly.  However, if you hold the underlying funds directly, you would have to rebalance and adjust them.   The extra cost with VLS is to pay for them to do that.

Thanks. Yes, I realised that. The bit I was trying to work out is exactly how much more expensive it was, so I could work out whether it's worth doing it myself. 

That is easy.  Look at the OCF and TC for both VLS and the underlying funds.   (not just the OCF).

bowlhead99

Blossom656 said:

dunstonh said:

The VLS funds are more expensive than holding the underlying funds directly.  However, if you hold the underlying funds directly, you would have to rebalance and adjust them.   The extra cost with VLS is to pay for them to do that.

Thanks. Yes, I realised that. The bit I was trying to work out is exactly how much more expensive it was, so I could work out whether it's worth doing it myself. 

LifeStrategy invests in a bunch of other funds. The ongoing charge it quotes as 0.22% follows the industry guidelines which say that it should include the ongoing charges of the underlying portfolio funds in which it invests, when telling you what the product is costing you. 

So if the charge for LifeStrategy is 0.22%, that might be split 0.12% for the underlying funds run by Vanguard in Ireland that you could invest in directly yourself, and 0.10% for Vanguard in UK to build and operate the 'strategy' product on top which takes your money and allocates it and rebalances it and reports it back to you.  Or, perhaps it is 0.17% for the underlying funds in Dublin and 0.05%  to London.

But the answer you're looking for is that if the underlying funds are costing 0.12%, it doesn't cost you ANOTHER 0.22% on top to have the product built for you, because the 0.22% they quote already includes whatever operating costs are borne at the underlying fund level.

As dunstonh notes, as with any fund there are also transaction costs for the fund structure (costs involved in buying and selling the underlying funds and assets from time to time) which are not included in OCF because they simply change the net costs of what each asset costs the fund to buy and what proceeds are received on sale when the fund sells the asset. All those factors will come through to the eventual fund NAV.  But for a full picture of costs, for comparability with other products, you could add those on, so that you've considered everything. Although it does not always give meaningful results because the transaction cost calculation methodology used in the fund management industry is far from ideal.

Sailtheworld

The OCF of a Lifestrategy fund is roughly double that of the underlying assets. That sounds like a lot but it's double a tiny number. To replicate on a DIY basis would incur trading charges when buying each of the 10 or so underlying assets - to be ahead would require a substantial sum invested. That's before deciding how to or whether to track the VLS fund ongoing.