FT Advisor podcast on VLS range

JohnWinder

No, I didn’t listen to it, and sorry for my toxic response; I should have kicked the cat instead, and certainly didn’t want the messenger who summarised the podcast shot.

But to be clear, I certainly wasn’t suggesting that the VLS series are passive funds; that would be nonsense, since Vanguard says they are active funds, and I wrote

VLS, and the alternative funds (?Lang Cat) this FT piece is bringing to our attention are all active funds<br>

any asset can get risky when its valuation gets stretched.

So I did listen to it, and that comment is central to their discussion. The guests speculate on the future for equities since US P/E’s are high, and for bonds since interest rates are low. This is where they lose me: guessing what might happen and then suggesting VLS should shorten the duration of its bonds and diversify equities beyond US/UK is futile since we know even the expert analysts can’t get these market timing strategies right enough for their customers to profit from them.
Yes, it’s fine to have a discussion about whether one active fund (VLS) is making different and worse decisions about its asset allocation than other active funds, but how far does that get the audience? I just can't see it helps us; it may entertain, but we all have different tastes I suppose.

And yes, since advisors come in for some criticism on the podcast, advisors should be telling their VLS clients that they’ve had some very good years as the guests note, and that history suggests that won’t go on for a long time; but to suggest the VLS range (of active funds) should adopt the market timing approaches that some of the active funds they mention are moving to, is a wasted exercise for the audience I feel.

Still and all, I did half enjoy it, that's the sad part.

Bobziz

Thrugelmir said:

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. 

Indeed, seems a very strange strategy. If their modelling is correct then the performance of the LS products will drop off relative to Lifetarget. Will retail investors then be offered the opportunity to invest in the shiny new LT product which has been available exclusively through advisors for some time ? Wont people be asking why they didn't employ the same modelling on the LS products earlier ? Won't this undermine confidence in all VG multi asset products ? 

Thrugelmir

Bobziz said:

Thrugelmir said:

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. 

Indeed, seems a very strange strategy. If their modelling is correct then the performance of the LS products will drop off relative to Lifetarget. Will retail investors then be offered the opportunity to invest in the shiny new LT product which has been available exclusively through advisors for some time ? Wont people be asking why they didn't employ the same modelling on the LS products earlier ? Won't this undermine confidence in all VG multi asset products ? 

One suspects paying higher level of fees goes against why have people selected VLS over the past decade or so. Lethargy will result in the funds remaining sizable for some considerable time. As interest rates rise in the future then the model could become effective again. 

Alexland

Deleted_User said:

Norman Lamont once said "No pain, no gain" about the use of interest rate rises to reign in the economy; but today there would be no question of raising interest rates to the levels of his day to reach to the "pain".

This idea that high-quality bonds (like those in VLS) could fall 20-40% over 3-5 years is simply implausible. Central banks have no reason to raise rates by the kind of amount that would lead to such large falls.

With a 10 year gilt paying 4.25% currently valued at around 137% of it's redemption value then interest rates wouldn't need to go back too many years for a VLS20 investor to see a 25% reduction in capital during their suggested 3 years of fund ownership. Government intervention may be unable to stop the end of the very long bull market for bonds and yes it would cause a lot of pain to a global economy accustomed to low rates. Wasn't Jack Bogle himself of the view that over the very long term asset valuations would likely revert to their mean? Whether it happens or not it's a risk that the average low risk investor might not realise they are taking on.

Thrugelmir

Alexland said:

Deleted_User said:

Norman Lamont once said "No pain, no gain" about the use of interest rate rises to reign in the economy; but today there would be no question of raising interest rates to the levels of his day to reach to the "pain".

This idea that high-quality bonds (like those in VLS) could fall 20-40% over 3-5 years is simply implausible. Central banks have no reason to raise rates by the kind of amount that would lead to such large falls.

With a 10 year gilt paying 4.25% currently valued at around 137% of it's redemption value then interest rates wouldn't need to go back too many years for a VLS20 investor to see a 25% reduction in capital during their suggested 3 years of fund ownership.

That's why the maturity yield is so important. With a running yield of around 3% it's a question of jam today not tomorrow.  Creates an illusion that bonds are performing well. True yield is nearer 0.5% if held to maturity. 

Albermarle

It just seems like more of the last decade's repeated assertions that the bull market in bonds is now over. I expect to hear the same predictions for at least another decade before it happens 

Although many bond funds dipped earlier this year and have only partly recovered. So probably it has reached some kind of peak .

Bobziz

Thrugelmir said:

Bobziz said:

Thrugelmir said:

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. 

Indeed, seems a very strange strategy. If their modelling is correct then the performance of the LS products will drop off relative to Lifetarget. Will retail investors then be offered the opportunity to invest in the shiny new LT product which has been available exclusively through advisors for some time ? Wont people be asking why they didn't employ the same modelling on the LS products earlier ? Won't this undermine confidence in all VG multi asset products ? 

One suspects paying higher level of fees goes against why have people selected VLS over the past decade or so. Lethargy will result in the funds remaining sizable for some considerable time. As interest rates rise in the future then the model could become effective again. 

I was referring to the modelling which determines the regional equity allocation rather than the model of a fixed allocation of equities & bonds. Very different equity allocation between LS and LT products.

Thrugelmir

Bobziz said:

Thrugelmir said:

Bobziz said:

Thrugelmir said:

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. 

Indeed, seems a very strange strategy. If their modelling is correct then the performance of the LS products will drop off relative to Lifetarget. Will retail investors then be offered the opportunity to invest in the shiny new LT product which has been available exclusively through advisors for some time ? Wont people be asking why they didn't employ the same modelling on the LS products earlier ? Won't this undermine confidence in all VG multi asset products ? 

One suspects paying higher level of fees goes against why have people selected VLS over the past decade or so. Lethargy will result in the funds remaining sizable for some considerable time. As interest rates rise in the future then the model could become effective again. 

I was referring to the modelling which determines the regional equity allocation rather than the model of a fixed allocation of equities & bonds. Very different equity allocation between LS and LT products.

LS and LT have different price structures for a reason. Vanguard have built on a reputation (in the UK) on a particular product range. Not good PR to say "we think this is now better model".  More appropriate to allow a natural transition over time and allow social media etc to progressively spread the word. Vanguard may see a better business opportunity in another segment of the retail market longer term. 

Alexland

Deleted_User said:

Governments (such as the UK), who borrow in the currency they also issue, have complete control. They set the current interest rate (i.e. bank base rate). And via QE, they also have control of interest rates (yields) at all other (short, medium and long) terms. And the prices of gilts simply follow from the yield curve.

Governments need to balance multiple priorities including managing inflation and currency stability and with rates at historic lows we are in uncharted territory as if the tools they have been using will remain effective. There are likely to be trade offs in the years ahead and bond holders may not always be on the winning side.

masonic

Deleted_User said:

Thrugelmir said:

Alexland said:

Deleted_User said:

Norman Lamont once said "No pain, no gain" about the use of interest rate rises to reign in the economy; but today there would be no question of raising interest rates to the levels of his day to reach to the "pain".

This idea that high-quality bonds (like those in VLS) could fall 20-40% over 3-5 years is simply implausible. Central banks have no reason to raise rates by the kind of amount that would lead to such large falls.

With a 10 year gilt paying 4.25% currently valued at around 137% of it's redemption value then interest rates wouldn't need to go back too many years for a VLS20 investor to see a 25% reduction in capital during their suggested 3 years of fund ownership.

That's why the maturity yield is so important. With a running yield of around 3% it's a question of jam today not tomorrow.  Creates an illusion that bonds are performing well. True yield is nearer 0.5% if held to maturity. 

Yes, with gilts it's best to skip straight to looking at the yield to maturity (i.e. currently 0.5% or so for a 10-year gilt). That's all that matters. The much higher running yield, and the large capital loss on holding to maturity, are both distractions: they largely cancel one another out.

When doing this it is plain to see that the YTM on any duration gilt is either guaranteed or likely to be below the returns from the best available consumer savings accounts. It's tempting not to look past that. However, the one redeeming feature of long dated gilts is their potential to counterbalance another downturn, especially if interest rates are taken negative. Cash provides some protection from interest rates moving in the other direction, while index linked gilts provide some protection against an unexpected uptick in inflation. Which is more likely is a matter we won't reach a consensus on.