Prudential - advice on funds

stephenadarglas

https://monevator.com/passive-fund-of-funds-the-rivals/  Some general advice on tracker funds.

bowlhead99

stephenadarglas said:

https://monevator.com/passive-fund-of-funds-the-rivals/  Some general advice on tracker funds.

That's a good place to start as is shows some of the key features of the main rivals. 

I'm not really a fan of some of the conclusions, such as the way they prefer more static allocations like Vanguard over the risk-targeted flexible allocations like HSBC, Architas and L&G.

They say, "As for the rest, did they add value with all their expert analysis and volatility management and huffing and puffing? No, the other active managers lagged a simple passive strategy, as per usual." 

As they are fans of passive investment styles and have an aversion to active management, they are keen to imply that having a flexible allocation to target a particular level of risk appetite throughout the economic cycle is a bad thing - that you are better not doing that 'huffing and puffing' and just taking the return that Vanguard got with its static allocations.

But a major part of why Vanguard got a relatively higher return than the others was because it has three quarters of its equities allocated to companies listed on foreign markets over a time period when sterling devalued significantly, and most of the others have less. HSBC had more ex-UK than Vanguard and its three year return (the period between the leave EU referendum and the article publication) was 3% higher (1% annualised), while the other managers generally did not, so they had lower returns. Monevator describes this as, "the other active managers lagged a simple passive strategy, as per usual". Perhaps it is more the case that 'picking an allocation that turns out to be the best' is the best strategy.

Not wishing to go over the Monevator article in detail on this thread, as it has been discussed before, but just pointing out that financial bloggers have their own opinions and viewpoints that come through in their writing - and so people are best using such articles as jumping-off points for their own research rather than treating them as gospel.

To the OP, yes I expect the Global Strategy Dynamic will be a perfectly reasonable fund to hold if you're the sort of person who's happy with the level of risk offered by that fund or by VLS 80.

Albermarle

When we talk about these types of funds having home bias, ( like the Life strategy funds ) it is usually only the equity part that is mentioned . Is a home bias to the non equity part as much of an issue ?  ( for those who are not keen on home bias generally )
 

AnotherJoe

Albermarle said:

When we talk about these types of funds having home bias, ( like the Life strategy funds ) it is usually only the equity part that is mentioned . Is a home bias to the non equity part as much of an issue ?  ( for those who are not keen on home bias generally )
 

I was going to say no because the issue with the home bias in equities is to do with making the portfolio less diverse and more reliant upon a smaller set of companies and industries. 

However with bonds I suppose there's an issue that inflation is better coped with by more diversity across currencies and so less diversity there is also a bad thing

bowlhead99

Albermarle said:

When we talk about these types of funds having home bias, ( like the Life strategy funds ) it is usually only the equity part that is mentioned . Is a home bias to the non equity part as much of an issue ?  ( for those who are not keen on home bias generally )
 

Generally the purpose of non-equities (especially bonds) is to take the edge off the volatility you get with equities. As such, something stable (domestic investment-grade bonds and gilts) can do that job.  Some would argue that there is no need to seek out international bonds because that just introduces currency risk (as well as default risk if using less-stable countries' bonds) and you can get all the currency risk that you want from your equities allocation.

Of course, international bonds  (or international bonds hedged to sterling) can get you a more diversified result - e.g. UK and German and Japanese and US bonds may not all be paying the same rate of interest, or have the same average maturities, and the interest rates and credit ratings and political agendas in those other countries may fluctuate at different times to the UK causing a more 'diversified' change in capital values. And currency risk is not necessarily something to be afraid of because the basket of goods and services you buy in retirement will necessarily have a lot of foreign cost base in it, so it doesn't hurt to hold foreign assets.

But if you are in the school of thought that says you want your bond investments to be a rock solid stabiliser with low returns (and negative returns sometimes, but hopefully at different times to your equities) you may well feel that UK bonds only is fine. If you want the different types of bonds to offer more diversified income and capital variations you may look to have some (or a lot) of your bonds be international ones, and pay for hedging if you don't really want the currency fluctuations of that (because a 20% adverse currency swing is unwelcome if you were hoping your bonds wouldn't drop more than 10-15%).  

So there are different approaches and they won't always be the same from product to product.

LifeStrategy for example uses bonds hedged to sterling because it feels its target audience is looking to moderate the equity volatility by taking on bonds so is not seeking a lot of currency risk, but thinks that it is better to access a broad range of returns from the global market and not just look at what the UK bond market has to offer.  Whereas other mixed asset funds may use unhedged global bonds. And some people's portfolios would avoid global bonds because they think UK gilts (including both regular and index-linked gilts) and corporate bonds (both investment grade and junk) will be adequate to take the edge off equity volatility - and may have other dampeners / diversifiers such as property, infrastructure assets, commodities etc.   

My own view is that 'a bit of everything' can be useful even if some things do not have high weightings at all times, and I don't mind investment risk, so I wouldn't have my non-equity investments be all UK and I wouldn't necessarily want all those foreign assets to be GBP hedged either.  However, some hedging can be quite rational given you are probably not looking for the foreign element of your bonds to drop by 20% at the same time as the foreign element of your equities drops 20% in a situation where sterling strengthens by that amount.

Ideally you don't want the different elements of your portfolio to be highly correlated, because you can't then get the diversification benefits of rebalancing and lowered volatility. So if most of your equities are ex-UK, then having a lot of unhedged, ex-UK non-equities at the same time - which could suffer the same magnitude and direction of currency swing at the same time - is counterproductive in terms of building a non-correlated set of assets to withstand all sorts of 'market shocks' that can happen over the decades.

Albermarle

Thanks for the explanation Bowlhead .
Interestingly I checked five different 'conservative ' multi asset funds ( means equities 35% to 45% ) . Three had a UK bias ( one was 40%UK)  and two did not .
Year to date performance for all of them was very close to 1 % up . Any difference between them was negligible, so from this evidence the UK % does not have any significant effect. Of course could be different in different market conditions.

bowlhead99

Albermarle said:

 Of course could be different in different market conditions.

Yes, you are not always going to be holding the funds over a short period in which currency has only fluctuated within a 10% band and global governments have had reasonably consistent policies on interest rates and QE as the year unfolded. 

In 'real life', people wouldn't usually make investment decisions based on a year-to-date performance, or use a short term snapshot to conclude on something 'from this evidence...'.  They would generally look for more evidence, or simply consider the practicalities of how the funds operate and how a different mix of asset classes and regions could affect the outcome.