VLS Region Breakdown

lindabea · 27 June 2020 at 3:39PM

Thank you all for your replies, but I don't think I have grasped this concept yet. The way I read the Trustnet figures, is that VLS60 has a 25% of its fund value invested in UK equities and bonds, whereas 39% of its value in USA based equities/bonds. In my mind, this makes it US biased not UK. Please explain why my interpretation is not right.

eskbanker · 27 June 2020 at 4:06PM

lindabea said:

Thank you all for your replies, but I don't think I have grasped this concept yet. The way I read the Trustnet figures, is that VLS60 has a 25% of its fund value invested in UK equities and bonds, whereas 39% of its value in USA based equities/bonds. In my mind, this makes it US biased not UK. Please explain why my interpretation is not right.

It depends what you mean and understand by 'biased' - in terms of simple maths then yes, the largest geographical representation is clearly the USA.

However, the point that we've been trying to explain is that VLS has a significantly higher UK representation than similar funds from its competitors, even if this isn't sufficient to make the UK the highest of all. So, Vanguard has about 25% UK but its competitors typically have less than 10%, and hence the comments you'll have seen elsewhere that describe VLS as being more UK-focused than their competitors (but not more UK-focused than the USA).

lindabea · 27 June 2020 at 4:40PM

eskbanker said:

lindabea said:

Thank you all for your replies, but I don't think I have grasped this concept yet. The way I read the Trustnet figures, is that VLS60 has a 25% of its fund value invested in UK equities and bonds, whereas 39% of its value in USA based equities/bonds. In my mind, this makes it US biased not UK. Please explain why my interpretation is not right.

It depends what you mean and understand by 'biased' - in terms of simple maths then yes, the largest geographical representation is clearly the USA.

However, the point that we've been trying to explain is that VLS has a significantly higher UK representation than similar funds from its competitors, even if this isn't sufficient to make the UK the highest of all. So, Vanguard has about 25% UK but its competitors typically have less than 10%, and hence the comments you'll have seen elsewhere that describe VLS as being more UK-focused than their competitors (but not more UK-focused than the USA).

Right - now I understand. I think I misinterpreted other people's comments about VLS being UK biased or focused. I thought they meant within the fund itself not in comparison to other similar funds. Thank you for explanation - much appreciated

bowlhead99 · 27 June 2020 at 4:54PM

lindabea said:

Thank you all for your replies, but I don't think I have grasped this concept yet. The way I read the Trustnet figures, is that VLS60 has a 25% of its fund value invested in UK equities and bonds, whereas 39% of its value in USA based equities/bonds. In my mind, this makes it US biased not UK. Please explain why my interpretation is not right.

One way to look at it is that across the world, the sum total of all the market values of companies listed on stock exchanges around the world (including the UK) is about $50 trillion as of the end of last month (FTSE All-World index or FTSE Global Total Cap index). While the total value of the companies listed on the London stock exchange and making up the FTSE UK All-Share Index is about £2 trillion (more like $2.5 trillion dollars).

So the UK stock market's share of the world stock markets' totals is $2.5/$50 trillion or about 5%. The US is more than ten times that share of the global stock markets and the UK is a relative minnow. Microsoft and Amazon and Google between them are more valuable than the entire UK stock market put together.

It is similar with bonds, there are a lot more bonds issued internationally (including US as the biggest source of issues of bonds).

But when Vanguard launch a product targeting UK consumers they think that those UK customers will not really want to have 95% of their assets overseas, so rather than only give them 5% UK investments, they give them 25% instead. It doesn't give the UK a bigger allocation than the US which is massive as a global superpower with companies whose at market values are higher than the UK So the investment product has a 'bias' to the UK, because it's 5x as much as you might naturally expect if you were a space alien just looking in on how the world allocates it's money in investment products.

If you lived in France or Taiwan or Canada or Australia and were not planning on retiring in the UK, you would not have a reason to 'bias' your investment weighting to the UK, and might bias it more to your home region. Vanguard UK does bias its UK lifestrategy product to the UK, a lot more than it allocates to the UK within the Lifestrategy product that it offers to US customers, for example.

Still, they are not alone among UK providers of mixed asset funds in allocating 'more than a space alien might expect' to the UK equity and bond markets. L&G, BlackRock etc will also give a lot more than a 5% allocation to UK. HSBC Global Strategy is a bit of an outlier in offering so little UK equity exposure within their total equities but as mentioned they do employ some hedging on overseas equities.