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Why Vanguard's Tracking Error?

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  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    edited 29 October 2020 at 5:38PM
    dunstonh said:
    Alexland said:
    It's worth noting that Vanguard themselves described the fund as "not benchmarked" so I don't know where you got the information about which benchmark to compare performance against? I'm with Prism and don't see the need for VLS100 as their All Cap fund is a better option at a similar ongoing charge.

    VLS100 is an anomaly and you can easily argue that it shouldn't exist.  But they have £2058.98m invested in it.  So, commercially, it makes sense for Vanguard to offer it.  That is £2058.98m worth of investors that don't know what they are doing.

    It does seem pointless. They already have FTSE All World, FTSE Global All Cap, FTSE Developed World and FTSE Developed World ex UK, ESG Developed World All Cap, and the active and factor global equity funds.
    Maybe they were thinking they'd look stupid if they brought out the LS range without a 100% option? It does provide consistency and simplicity, but the idea of Vanguard setting the home bias at 25% seems silly. Why not a global LS and a UK LS range to make it clearer? Why not provide educational materials to help more amateur retail investors "build your own portfolio".
    VLS and TR are ready constructed portfolios.  The other funds are in essence just building blocks. 

    Providing educational materials would require Vanguard to change their well manicured image that gets passed by word of mouth. Not that it's already far removed from the simple offerings it once had. 

    Vanguard steer well clear of making recommendations or allowing their fund managers/analysts to make market commentaries. In the same way that Blackrock do. 

  •  I suspect the OP was looking at the default comparison (IA Global) on Trustnet.



  • Notepad_Phil
    Notepad_Phil Posts: 1,563 Forumite
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    edited 29 October 2020 at 6:07PM
    Edit - just beaten to the post by DarwinBoy.
    I'm 99.99% sure that the OP has looked at VLS 100 on trustnet and that's where the benchmarking has come from https://www.trustnet.com/factsheets/o/acdv/vanguard-lifestrategy-100-equity-a-acc - it's IA Global which encompasses "Funds which invest at least 80% of their assets globally in equities. Funds must be diversified by geographic region.", so OP the difference is not a tracking error, it's that it's not performing as well as other similarish funds over recent history.
    If the OP goes back to trustnet and clicks on "Explore further with Interactive Charting" and sets the timescale to 10 years then they'll see that VLS 100 and IA Global have deviated from each other for much of the 10 years, with VLS 100 being ahead for most of the time. Whether recent history is just a blip and VLS 100 will come roaring back, or whether it will remain behind is an unknown which will only be answered when you look back at the performance in years to come, the real questions a potential VLS 100 purchaser needs to ask themself is what is your strategy and then whether VLS 100 fits in with that strategy.
  • talexuser
    talexuser Posts: 3,533 Forumite
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    I had lifestategy 100 for the grandkids for a few years when the performance was ok, but jumped a few years ago when I thought the UK allocation was beginning to drag it down. I think the point is that the 25% UK somewhat smooths currency fluctuations, so you don't lose out so much when the £ stengthens, assuming the FTSE is doing ok? However a consistently strong £ is maybe not a trend we see in the near (or even medium) future.
  • Edit - just beaten to the post by DarwinBoy.
    I'm 99.99% sure that the OP has looked at VLS 100 on trustnet and that's where the benchmarking has come from https://www.trustnet.com/factsheets/o/acdv/vanguard-lifestrategy-100-equity-a-acc - it's IA Global which encompasses "Funds which invest at least 80% of their assets globally in equities. Funds must be diversified by geographic region.", so OP the difference is not a tracking error, it's that it's not performing as well as other similarish funds over recent history.
    If the OP goes back to trustnet and clicks on "Explore further with Interactive Charting" and sets the timescale to 10 years then they'll see that VLS 100 and IA Global have deviated from each other for much of the 10 years, with VLS 100 being ahead for most of the time. Whether recent history is just a blip and VLS 100 will come roaring back, or whether it will remain behind is an unknown which will only be answered when you look back at the performance in years to come, the real questions a potential VLS 100 purchaser needs to ask themself is what is your strategy and then whether VLS 100 fits in with that strategy.
    OP Here... You're right Notepad Phil. Thanks for the observation. I do understand 'tracking error'. What I should have said is that VLS1 100 has the same asset allocation as AI Global. So why have they deviated or is the deviation just a blip amplified by a particular set of comparative graph views (well observed Notepad)? Vanguard say the fund is not benchmarked, but you'd be hard pressed to say that the management didn't take a lead from AI Global if you compare the graphs for any time period.

    I'm in VLS100acc and it suits my strategy. I'm just trying to work out if there's anything better. Any ideas, anyone?

  • No, VLS100 has a very different asset allocation to that sector average, it's very much overweight in UK equities. Surprising that the two graphs are so similar for so long. 
  • Alexland said:
    It's worth noting that Vanguard themselves described the fund as "not benchmarked" so I don't know where you got the information about which benchmark to compare performance against? I'm with Prism and don't see the need for VLS100 as their All Cap fund is a better option at a similar ongoing charge.

    Good point I hadn't considered. I went into VLS100acc long before the ftse all cap fund was introduced in 2016. Is it now time to change? Are there any risks in switching to https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-global-all-cap-index-fund-gbp-acc? It does look like they're like-for-like or very close to it.
  • Alexland said:
    It's worth noting that Vanguard themselves described the fund as "not benchmarked" so I don't know where you got the information about which benchmark to compare performance against? I'm with Prism and don't see the need for VLS100 as their All Cap fund is a better option at a similar ongoing charge.

    Good point I hadn't considered. I went into VLS100acc long before the ftse all cap fund was introduced in 2016. Is it now time to change? Are there any risks in switching to https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-global-all-cap-index-fund-gbp-acc? It does look like they're like-for-like or very close to it.
    There are no inherent risks in switching.
    They will always behave very similarly - just compare (for example) IA UK All Companies and IA Global back to 1990.
    VLS 100 upweights the UK from the ~5% of the global stock market it takes up (as would be reflected in the global all cap fund) to ~25% for no particular reason.
    IA Global is a poor reflection of the global index because it is an average of UK global equity funds, which aren't necessarily truly reflective of the total global market (home bias, and UK based global funds on average underperform the index by quite a bit). You'd be better of selecting "indices" and then "FTSE world".
    The debate about which of the two funds you are talking about is better comes down to:
    1. The global all cap is better because it is 'pure' passive global indexing, and the UK is a crap investment right now so get your money out and switch (other, sometimes cheaper global index funds such as HSBC FTSE all world are also available)
    Vs
    2. Some home bias makes sense, it's not going to make a huge difference in the long run, the UK is really cheap right now so I want a little more of my money at home rather than a purely passive vanilla global tracker.
    As for whether now is the time to change, that's market timing so who knows?
  • Alexland said:
    It's worth noting that Vanguard themselves described the fund as "not benchmarked" so I don't know where you got the information about which benchmark to compare performance against? I'm with Prism and don't see the need for VLS100 as their All Cap fund is a better option at a similar ongoing charge.

    Good point I hadn't considered. I went into VLS100acc long before the ftse all cap fund was introduced in 2016. Is it now time to change? Are there any risks in switching to https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-global-all-cap-index-fund-gbp-acc? It does look like they're like-for-like or very close to it.
    There are no inherent risks in switching.
    They will always behave very similarly - just compare (for example) IA UK All Companies and IA Global back to 1990.
    VLS 100 upweights the UK from the ~5% of the global stock market it takes up (as would be reflected in the global all cap fund) to ~25% for no particular reason.
    IA Global is a poor reflection of the global index because it is an average of UK global equity funds, which aren't necessarily truly reflective of the total global market (home bias, and UK based global funds on average underperform the index by quite a bit). You'd be better of selecting "indices" and then "FTSE world".
    The debate about which of the two funds you are talking about is better comes down to:
    1. The global all cap is better because it is 'pure' passive global indexing, and the UK is a crap investment right now so get your money out and switch (other, sometimes cheaper global index funds such as HSBC FTSE all world are also available)
    Vs
    2. Some home bias makes sense, it's not going to make a huge difference in the long run, the UK is really cheap right now so I want a little more of my money at home rather than a purely passive vanilla global tracker.
    As for whether now is the time to change, that's market timing so who knows?
    That a good analysis. ...two things to do, I think:
    1. If the UK is crap now and I'm already in it then staying in makes some sense even though I'm and avid 'you can't time the market' guy.... but...
    2. Monitor it until it goes up then switch to a cheaper than Vanguard, but like-for-like fund.

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