FT Advisor podcast on VLS range

Alexland

At the end of last week FT Advisor posted a well considered podcast on the VLS range exploring how advisors have been using them and warning how the high US tech and long dated bond allocation that has so worked well in recent years are increasingly not what is being found in risk managed model portfolios. Will the VLS asset allocation "come back to bite people" and will changing market conditions mean "something really horrible" is about to happen to a lot of clients that thought they were taking a simple and balanced approach?

https://www.ftadviser.com/investments/2021/08/13/lifestrategy-at-10-what-impact-has-it-had-on-advice/

JohnWinder

Thanks. So what do we think it is? An educational piece putting a balanced view? A journalist filling space with a non-issue we don't need to bother with because it won't help? An opportunity for two people who appear to work for Vanguard competitors to cast some doubts on the VLS range?

Undoubtedly the way the VLS mixes are made will under-perform some other ways of mixing assets, during different periods past or future, but what are we to do? Are Vanguard adjusting their asset mix substantially in response to market timing considerations, or are they sticking with a strategy that has but might no longer be the optimal way (if Japan and China sky-rocket and the US tanks)?

Maybe save me listening to the whole thing in case it's really worthwhile for me, because the intro text had me confused: "So I can see a dichotomy with people using centralised investment propositions that use those external asset allocation models having to explain why it is that the clients that they put into Lifestrategy have got very different allocations and very different sets of risks than what they are seeing in their model portfolio services, and I do think there is a significant number of advisers who haven't squared that circle."  That's quoting one of the podcast guests. Is that the clearest he can express himself?

Alexland

While both of them used to work for Old Mutual they now work for consultancies working with the advice industry and to be fair the language and ideas are not aimed at the retail investor but for those more familiar with such terminology. I have always found content with input from the Lang Cat to be reliable.

For much of the podcast they are complimentary of how Vanguard have reduced fees and almost set the multi asset performance benchmark for the past decade. The problem seems to be how an advisor can justify putting their simple clients into VLS portfolios while also now doing something very different with their ongoing model portfolio clients because of the risks that have accumulated from the valuation growth found in VLS' underlying assets. As such the risks facing a VLS investor are increasingly different from the risks facing a model portfolio investor.

Are Vanguard doing anything to address these higher levels of risk? Not really. Should they? Maybe. Is it responsible to continue marketing VLS20 and 40 as lower risk funds when they contain such a high proportion of rate sensitive long dated bonds? Hmm...

Thrugelmir

Balanced discussion. Covered many points that have been discussed on here.  The fixed allocation strategy that Vanguard uses has been it's a major part of it's success over the past 10 years but also potentially it's achilles heel. As was said in the podcast. Takes years to build a reputation and seconds to destroy it. 

coastline

If you switch the website to " Professional " there are other products available but at the moment don't seem to be available to the general public. Just thought I'd add this on here just in case anyone wants to have a look.

LifeTarget Model Portfolios | Vanguard UK Professional

Alexland

Interesting to see their Moderate 60/40 LifeTarget portfolio has higher UK than US equities allocation reflecting their capital market model expectation that the US is likely to underperform other markets over the next decade. If this is their answer for informed professional advisors (even if some of them still use VLS) it makes you wonder why they continue to sell the current formulation of VLS as their core product for retail clients. Maybe its because retail customers expect to see certain companies in the top 10 and are more inclined to buy based on recent past performance?

Thrugelmir

Alexland said:

Interesting to see their Moderate 60/40 LifeTarget portfolio has higher UK than US equities allocation reflecting their capital market model expectation that the US is likely to underperform other markets over the next decade. If this is their answer for informed professional advisors it makes you wonder why they continue to sell the current formulation of VLS as their core product for retail clients.

History is littered with funds that grew too big for their own good. Easier to start a new fund than realign an existing one. The bigger the VLS funds become the more difficult it will be to make major structural rebalancing changes. You can see from the posts on MSE that there's a negative mantra towards the UK.  Which makes increasing the UK % even more of a challenge and something of a hard sell to retail investors. Who are fixatated with global equity funds. 

JohnWinder

Alexland said:

For much of the podcast they are complimentary of how Vanguard have reduced fees and almost set the multi asset performance benchmark for the past decade. The problem seems to be how an advisor can justify putting ...

Thanks. That's clear. They should have had you on the podcast.

VLS, and the alternative funds (?Lang Cat) this FT piece is bringing to our attention are all active funds, but I suppose a manager can be more or less active. Both are diverging from market cap weighting in their equities, Lang Cat more than VLS by the sound of it if they're reducing US and increasing UK stock holdings. It must be more of a gamble the more you move away from market cap weighting, especially because you think you can anticipate the market. We know how that usually ends. We must wait to see which does better.

Someone's concerned about misrepresentation in calling a fund 'lower risk' even though it holds long term bonds. Really, as if there was any precision in 'lower risk' as a descriptor.

I don't see this FT piece contributing much other than promoting someone's funds.

Alexland

JohnWinder said:

I don't see this FT piece contributing much other than promoting someone's funds.

I don't know if you listened to the content but maybe if you are a hammer everything looks like nails. The lang cat is not a fund manager and anyone formulating a multi asset fund including Vanguard is going to be making active decisions. The idea that only having equities and bonds in varying 20% proportions is passive is nonsense. It doesn't reflect the holy grail of perfection and isn't unquestionably a good thing. Similarly the idea that long dated bonds are low risk is not a default answer as any asset can get risky when it's valuation gets stretched. While the fixed allocation and limited range of non-equity assets in VLS20 to 80 has always been an interesting point but current market conditions are making those within the industry reconsider the risks that might exist in that sort of asset allocation and if they are really appropriate for the low to adventurous risk customers they are being sold to.

If you compare the asset allocation with say the L&G Multi Index fund series (which is likely similar to many model portfolios) you can see the increasing divergence between a fund manager trying to maintain a risk profile across the cycle and the VLS series plodding on with a formulation that was in the sweet spot for recent market conditions regardless of medium term customer outcomes. As thrugelmir describes it will be difficult for Vanguard to sell a 'new coke' to their loyal VLS fans but with such substantial inflows can they afford to do nothing and ignore the increasing risk profile of their funds?

Thrugelmir

Alexland said:

JohnWinder said:

I don't see this FT piece contributing much other than promoting someone's funds.

I don't know if you listened to the content but maybe if you are a hammer everything looks like nails. The lang cat is not a fund manager and anyone formulating a multi asset fund including Vanguard is going to be making active decisions. The idea that only having equities and bonds in varying 20% proportions is passive is nonsense. It doesn't reflect the holy grail of perfection and isn't unquestionably a good thing. Similarly the idea that long dated bonds are low risk is not a default answer as any asset can get risky when it's valuation gets stretched. While the fixed allocation and limited range of non-equity assets in VLS20 to 80 has always been an interesting point but current market conditions are making those within the industry reconsider the risks that might exist in that sort of asset allocation and if they are really appropriate for the low to adventurous risk customers they are being sold to.

If you compare the asset allocation with say the L&G Multi Index fund series (which is likely similar to many model portfolios) you can see the increasing divergence between a fund manager trying to maintain a risk profile across the cycle and the VLS series plodding on with a formulation that was in the sweet spot for recent market conditions regardless of medium term customer outcomes. As thrugelmir describes it will be difficult for Vanguard to sell a 'new coke' to their loyal VLS fans but with such substantial inflows can they afford to do nothing and ignore the increasing risk profile of their funds?

I doubt that @JohnWinder has bothered to listen. Be a desecration for a Boglehead to see Vanguard become an active fund manager. As their professional range indicates. The VLS range hit a sweet spot in time and may do again in the future. Currently though the medium term outlook does not favour the regimentally fixed nature of the funds. The allocations being determined and set in a different era. 

Alexland

Deleted_User said:

On the equities side, the percentage they hold in big US tech stocks has increased as those stocks continue to outperform most other global stocks. But then VLS holds 25% of their equities in UK, which is in effect a lean to more "value" equities. Relative to market caps, they are overweight the UK, not the US.

I'd agree with that and since the start of this year we have a similar weighting to UK equities (although our UK bias is via investment trusts) which helps balance the value/growth and valuation divergence. On equities I am far from being anti Vanguard as my biggest single holding is VEVE for developed world exposure.

Deleted_User said:

On the bonds side, while bonds can fall, too, IMHO the sort of size fall that's plausible isn't that large. Specifically, not so large that high-quality bonds won't continue to function well as portfolio stabilizers. This is because policy makers would only raise interest rates a relatively small amount now; there is no prospect of going back to the old "normal" kind of interest rates. So much commentary over the last decade has assumed (or hoped) that the old normal would return, and it's become less and less plausible over time that it is about to do so.

While bonds might help reduce the volatility of a mostly equities portfolio once you start getting deeper into bonds particularly at VLS40 and 20 levels which Vanguard's website suggest as suitable for 3-5 year investment periods there is the realistic possibility of those recent equity-like capital gains (pull forward of returns) seen in the past few years reversing themselves back out again leaving investors nursing losses. Ok that won't happen if you don't believe it's possible that interest rates could increase but they are currently a very long way away from their long term average valuations so it's perhaps a larger risk than investors accepted when buying the funds.

Deleted_User said:

VLS has the great virtue of keeping it simple. Which is a much better approach than looking for obscure asset classes because of dubious rumours that the well-known asset classes don't work any more.

If you are gong to run with a high bond downside risk you might aswell buy something with a higher equities content or better to actually get the risk profile you wanted something with "obscure asset classes" such as cash and gold. If things go well the return on bonds is only slightly better than cash and while gold doesn't provide any income it has capital growth and both could improve the diversification and rebalancing alpha within a low to medium risk multi asset fund.