SIPP Flexi access drawdown based on Vanguard Lifestrategy x% equities

jamesd

BPL said:

Has anyone considered or done this? I loved the low cost of 0.22pc plus platform fee 0.2pc and the fact these funds are rebalanced without having to pay an ifa or diy effort. I'm thinking accumulation and sell units for income rather than natural yield from distribution. 

BPL said:

Thrugelmir said:

Not just the fees to be considered. Also the funds performance. 

I'm a passive investor (evidence based) and given that past performance is no guide to future performance i have to look for diversification. Paying another 0.11% to vanguard to rebalance seems value for money. 

If you wish to avoid active management "The Fund is actively managed" makes the Lifestrategy range incompatible.

From what I've seen these funds use continuous rebalancing when Vanguard research shows that longer intervals are desirable.

Since the evidence shows outperformance of UK active funds vs their benchmarks you might also want to revise your belief about that. For example, the FCA found that scatterplots of performance after fees vs their benchmarks shows most beating their benchmark for:

1. UK large cap - Figure 2, page 7 
2. Global Large Cap Equity - Figure 4, page 11
3. Europe Large Cap Equity - Figure 6, page 12

The FCA also did lots of regression analysis which in most asset classes found that the most expensive active funds underperformed the less expensive active ones,  with small cap being a notable exception.

While useful, this FCA work has a flaw from ignoring changes of human manager. Work I did here around 2006 showed that for UK global funds the outperformers continued to outperform unless the human manager changed. Past performance may not be a guide to future absolute performance but does seem to be for relative performance.

Results for US investors using US funds may well be different.

BPL said:

If you change asset allocation based on the "economic cycle" isn't that active management? Also i wonder what patty of the cycle covid, ww2 or the ws crash were on. I thought a passive investment used a predetermined asset allocation to achieve diversification. The evidence is that only 25% of active funds beat the market. Even then the failures are culled so they don't appear in the statistics. I take your point about the bond element, i guess there must be a rule of thumb equivalent for bonds though with lower volatility allowing some degree of accuracy. 

Yes, it's likely to be called active, like these funds. Covid and wars aren't part of the economic cycle but could trigger a change in it, like starting a recession.

Some passive definitions use fixed rules rather than fixed allocations for "active" "passive" approaches, vs trackers. That can mean say filters on which stocks to include. Indexes have been built that use those rules so you can even have an index tracker with lots of decisions behind its holdings.

For the funds in the FCA scatterplots it looks like way more than 25% and that examination I did of whether funds stayed in the top ten or quartile - yes, unless manager changed - is something you can do yourself.

For a reason to shift equity:bond allocation look at Guyton's sequence of return risk reduction approach based on cyclically adjusted price/earnings ratios.

The Lifestrategy funds are quite popular here and if you like their active approach to UK and other allocations they might be a good choice for you. Just be aware that you're getting something different from a (global equity tracker) : (global bond tracker) with rebalancing.

Given the above you might find it of interest that my own largest holding is a global developed market tracker. My combined biggest active holdings are small cap equity. I freely mix active and passive depending on what I'm after.

BPL

Or should we just stick with a rigid allocation even though we know that its not the right time to hold that asset and it will hurt performance or increase the risk?

All management decisions.

I take your points very interesting. If we just don't know what's going to happen without a crystal ball for major world events then how do we know what the right asset allocation is? Isn't the idea to diversify based on stress tests and let it sit with a rebalance periodically. Isn't that the passive or even stable active passive approach that evidence says works? If you look at the constituents of the VLSs it's fairly obvious what they are investing in, do you think in 1 2 5 10 years time the allocation will be the same?

dunstonh

 If we just don't know what's going to happen without a crystal ball for major world events then how do we know what the right asset allocation is?

Most fluid models work on the basis of investment risk.  That is largely measurable and it is not static.  Index Linked gilts, for example, are completely off the menu in most fluid models and have been for years.  It's logical that they are not included at this time.  Static models on the other hand won't necessarily be making that decision.   Investment grade bonds are always at greater risk of a default during a recession.  So, they are not the same level of risk reducer that they are during a growth period in the economy and they dont offer the upside growth.   

Currency fluctuations can come into play as well.   In the late 90s/early 2000s cycle, US equity was one of the worst performers.  It was made worse still for those in the UK as Sterling rose over that period (which reduces the values of globally priced assets).  So, it got a double whammy working against it.

Isn't the idea to diversify based on stress tests and let it sit with a rebalance periodically.

VLS is not doing that.  It rebalances too frequently to retain its core management decision which is fixed equity bond split.  The fluid allocation models do have volatility testing and will make adjustments to remain within that volatility range.

 Isn't that the passive or even stable active passive approach that evidence says works?

Diversification using risk targeting doesn't matter if it uses active or passive underlying investments.   The use of active or passive to meet your target allocations is just a further fine tuning element.    If your model says you are to put 24% in UK equity, then that is more important than whether you use active or passive to fill that 24%.  you could put a FTSE100 tracker to fill that 24%.  Or a FTSE250 tracker or FTSE all share tracker or xyz UK equity managed fund or a combination.     If you limit yourself to tracker only, then how much are you going to put in Large cap, Mid Cap and Small cap?     If you are going US equity, do you use NASDAQ, Dow Jones or S&P or another method to track?

A lot of people have used the US example of a two fund portfolio using an S&P500 tracker and bond tracker but used a FTSE100 tracker and gilt fund tracker in its place.   An absolutely dire decision but its still using passive funds.       Being passive doesn't automatically make things better.

If you go with a static option you take no account of any events.  Many events are short term and should be disregarded but some events are longer lasting and require new thinking.

If you look at the constituents of the VLSs it's fairly obvious what they are investing in, do you think in 1 2 5 10 years time the allocation will be the same?

No.  They do still make periodic changes.  Its clear when you compare the allocations over the years.  Here is VLS60 over the last 3 years (changes are slight but the sliding bar showing the figures is another thing that doesn't work well on a static object!)

Thrugelmir

BPL said:

dunstonh said:

BPL said:

Prism said:

BPL said:

Thrugelmir said:

BPL said:

Thrugelmir said:

Not just the fees to be considered. Also the funds performance. 

I'm a passive investor (evidence based) and given that past performance is no guide to future performance i have to look for diversification. Paying another 0.11% to vanguard to rebalance seems value for money. 

Vanguard VLS funds make an active choice as to fund allocation. Passively active.  

Yeah i understaff they are classed as passive or "stable" as the"active" management is limited to transparent rebalancing for diversification. They aren't claiming to"beat the market".

The active part of VLS is also related to asset allocation, as with all multi asset funds. Somebody has to decide how much to allocation to each country, which equity funds funds to use, which bond types to use and when to rebalance without incurring too many costs. So far I would say that the human element of VLS has been the weakest part of it. The best part is the simplicity and the fees.

Isn't the asset allocation fixed it just has to be achieved with fund purchases? If I put a VLS in x-ray every year wouldn't it come out with the same results. I wonder what a human could do without becoming an "active fund manager" which i would like to avoid. 

The asset allocation is not fluid throughout the economic cycle like many of the other similar funds.  So, that is a negative of VLS.  However, Vanguard to periodically adjust the weightings but have a rigid equity/fixed interest split.  Some consider that a negative as well.
Management decisions are made on the weightings to the sub funds and the arbitrary equity/bond split.
Not all management decisions are bad.   Adjustments to the weightings to reflect risk and reward are positive actions.  Stock picking is where some people do not consider them to be positive.   Being too rigid in asset and sector weightings can be a negative.   For example, most fluid models have reduced property, corp bonds and UK equity allocations pretty consistently over the last few years.  Static models have barely moved.    
The use of underlying passive funds keeps that part passive but its impossible to fully passive unless you go with a global tracker and 100% equities.

The evidence is that only 25% of active funds beat the market. 

Which market? There are many. There are now more indices than listed stocks. As the world has opened up over the past 30 years. The clear cut lines of old have disappeared and become increasingly blurred. 

jamesd

BPL said: Isn't the idea to diversify based on stress tests and let it sit with a rebalance periodically. Isn't that the passive or even stable active passive approach that evidence says works? If you look at the constituents of the VLSs it's fairly obvious what they are investing in, do you think in 1 2 5 10 years time the allocation will be the same?

That's not necessarily the idea. Adjusting based on where we appear to be in the economic cycle is a respected but active approach, even though certain determination of the cycle can only be done after it. Financial advisers have third party tools available that can vary allocations to funds based on a combination of risk number and assessed spot in the economic cycle.

There's a correlation between cyclically adjusted price/earnings ratios that's why I wrote the last paragraph of the first post in Drawdown: safe withdrawal rates saying that it's a relatively worse time than usual for high equity weightings.

VLS allocations are supposed to vary. At least some reasons for the variation are very sensible.

hyperhypo

I use a combination of Vanguard LS40 and  HSBC global balanced for the passive part of my drawdown account (40%), with two active funds ..Royal London Sustainable Diversified Trust and the Baillie Gifford Managed fund (35%)...25% is in cash presently.

I ...unexpectedly due to redundancy...also have a significant chunk of uncrystallised split 50/50 between a BlackRock  MyMap 4 and a Vanguard Target Retirement 2020 fund... probably more difficult to compare the MyMap 4 fund with any of its Vanguard or HSBC / L&G multi-index etc competitors. The Vanguard 2020 fund has been less volatile of late than MyMap 4.

i'm going to create a new thread to consider  manage the risk in the uncrystallised/crystallised parts of drawdown..it appears to me presently to have higher risk funds in the more longer term uncrystallised section ...my present uncrystallised choices are under review.

BPL

If you look at the constituents of the VLSs it's fairly obvious what they are investing in, do you think in 1 2 5 10 years time the allocation will be the same?

No.  They do still make periodic changes.  Its clear when you compare the allocations over the years.  Here is VLS60 over the last 3 years (changes are slight but the sliding bar showing the figures is another thing that doesn't work well on a static object!)

Looks fairly constant sorry from corporate bond spike and a slight bloated tech sector recently.... I'm not hung up on VLS but the low cost, covid recovery and the fact i don't have to rebalance seem to be working for me atm. Happy for any other recommendations in a similar vein lower risk and volatility long term suitable for SIPP / FAD

I put some common favourites on Fidelity's chart...vs VLS out of interest

Scottish mortgage wow, FT expected all the others v similar...

Audaxer

BPL said:

I was thinking of 20% equities perhaps alongside 100% or 80% so i can result adjust the equity / bond allocation. I'm trying to keep it simple as I'm stupid ;-) what are you using due your barbell?

If trying to keep it simple, why not just have one VLS fund - a VLS60 rather than both a VLS20 and a VLS100?

Audaxer

shinytop said:

BPL said:

Has anyone considered or done this? I loved the low cost of 0.22pc plus platform fee 0.2pc and the fact these funds are rebalanced without having to pay an ifa or diy effort. I'm thinking accumulation and sell units for income rather than natural yield from distribution. 

I do something similar; my main holdings are VLS60 and HSBC Balanced.  No real reason for splitting other than hedging/curiosity.  I'm thinking about replacing one of them (probably VLS) with a managed wealth preservation fund but I'm not convinced.  I also have a few years of cash and a small amount (10%) in more specialist managed equity funds.   

I think splitting between VLS60 and HSBC Global Strategy is a good choice. I have just compared the performance of them to two popular Wealth Preservation ITs - Capital Gearing Trust and Personal Assets Trust. They are perfectly good ITs but their returns over the last 5 years are lower than both multi asset funds. I have also considered these ITs, but to be part of a portfolio of active funds rather than to replace VLS60 or HSBC Global Strategy which I also hold.

Another_Saver

A lot of people have used the US example of a two fund portfolio using an S&P500 tracker and bond tracker but used a FTSE100 tracker and gilt fund tracker in its place.   An absolutely dire decision but its still using passive funds.       Being passive doesn't automatically make things better.

That's hardly a fair criticism of indexing, you're using the straw man "no such thing as passive" argument which was invented by the active industry to denegrate indexing - there will be plenty of active pension funds doing something similar. Your point is partly true going off the Barclays Equity Gilts Study data (just 1925-2017 because I'm lazy, but that's a sufficiently long time period that my point is not endpoint-dependent) the real returns in local currency using local inflation were as follows:

      Stocks     Bonds

UK  5.8%       2.1%

US  6.7%       2.6%

But turn those into nominal figures and you get

      Stocks     Bonds

UK  10.2%      6.4%

US  10.1%      5.6%

*again, I'm being lazy, these should be accurate with 2sf

And the entire difference in real stock returns can be explained by rerating caused by the domestic focus of America's huge boomer generation, vs the global focus of the UK's, pushing up US prices by a far greater extent. So aside from the US government having to pay a higher real interest rate to borrow from its citizens, the difference in returns isn't so big as to invalidate applying some principals and research from investing in the US to the UK.