FT Advisor podcast on VLS range

Thrugelmir

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.

Alexland said:

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.

Well, this is where you're wrong. 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.

Gilts are auctioned. The market sets the yield. QE is temporary. The Fed is already hinting at tapering. The BOE likewise.  At some point the safety net will be removed and it will be risk on. 

To quote Mark Carney from a few years back. The UK is reliant on the “kindness of strangers” to finance its current account deficit. 

JohnWinder

I’ve re-listened to the podcast. What might the naive listener get from these quotes about whether VLS is active or passive?

00.15: This year marks a decade since Vanguard’s life strategy range launched in the UK, and to say that passive funds have proven popular would be to downplay the situation. The 5 multi-asset funds are now worth ….

03.05: It’s (the Vanguard life strategy series) now got a 10 year track record,  And you’d be hard pressed as an active manager sometimes to get anywhere near the returns that Vanguard has had.

03.40: One of the arguments made by advisors (for VLS) if you don’t want to add some layer of sophistication by using the services of a model portfolio service or whatever, that life strategy fits the bill. Quite often the comparator (sic) is made with what an actively managed multi-asset fund might charge…

Each statement by a different person in the podcast, and no one tries to set the record straight. I wonder if the podcast is  meant to be just another active/passive debate, without a lot of balance.

tebbins

As I understand it the running yield, and yield to maturity for bonds are one and the same. To say that the coupon and regression to par cancel each other out is a truism.
Yields are determined by the market. Governments as issuers and central bankers are the single largest player in the market but that is far from in control - they cannot stop gilt holders buying or selling more or less if they consider other opportunities more or less worthwhile.

masonic

JohnWinder said:

I’ve re-listened to the podcast. What might the naive listener get from these quotes about whether VLS is active or passive?

00.15: This year marks a decade since Vanguard’s life strategy range launched in the UK, and to say that passive funds have proven popular would be to downplay the situation. The 5 multi-asset funds are now worth ….

03.05: It’s (the Vanguard life strategy series) now got a 10 year track record,  And you’d be hard pressed as an active manager sometimes to get anywhere near the returns that Vanguard has had.

03.40: One of the arguments made by advisors (for VLS) if you don’t want to add some layer of sophistication by using the services of a model portfolio service or whatever, that life strategy fits the bill. Quite often the comparator (sic) is made with what an actively managed multi-asset fund might charge…

Each statement by a different person in the podcast, and no one tries to set the record straight. I wonder if the podcast is  meant to be just another active/passive debate, without a lot of balance.

VLS is widely regarded to be a passive multi-asset fund by novices and professionals alike. Well regarded websites such as Monevator have articles on VLS in their passive investing section. One only needs to read the KIID to be disabused of this notion, however. There is a clear statement therein that it is actively managed in terms of asset allocation.

Since passive investing is commonly defined as trying to maximise returns by minimising portfolio turnover, VLS does get a lot of brownie points for not changing its asset allocation for long periods of time, much as a LTBH stock-picker would. It is, however, at liberty to change its allocation over time (maintaining the equities:bonds ratio, but changing what is in those buckets), which will upset those who want a passive investment, and failure to do so will upset those who expect it to be managed in the same way as rival multi-asset funds and newer Vanguard multi-asset funds. I don't think there is any clarity over the future asset allocation of VLS.

I don't see the lack of balance you do. It is right that the discussion should not only highlight the success of the strategy, but also caution that there are factors that could trip the strategy up in the future. All of the concerns (other than the reputational ones) do apply equally to a purist index investing allocation (i.e. just holding a single global equities index fund and unhedged global bond fund).

JohnWinder

It’s easy to find fault with anything that requires a subjective judgment, and anything can be improved, but I don’t/didn’t want to condemn it outright; rather, thought it could have been more balanced, and was more adult entertainment than enlightenment.
It started with how dominant VLS had become, praising its returns, transparency, costs, ‘accessibility’ to retail clients and attraction for advisors.
There was a throw away line at 04.40 that ’60/40’ will/might (can’t remember) ‘come back to bite them’.  We’ve discussed this matter here only recently, and I think a challenge to ’60/40’ could do with a rebuttal or questioning.
Their main concern with VLS was that it was sailing, perhaps blindly, into troubled waters with high P/E’s and low bond yields on long bonds, ignoring the chance to make some tactical changes or advising clients that their risks were rising. As you put it:

I don't see the lack of balance you do. It is right that the discussion should not only highlight the success of the strategy, but also caution that there are factors that could trip the strategy up in the future.

At that point my preference would have been to hear a challenge or questioning of this notion that you can anticipate market changes and be successful in picking where the future returns are.

Vanguard has a view on this, appearing in their recent quarterly economic report. Some extracts:

'Federal Reserve now expects to begin lifting interest rates from effectively zero in 2023, ....
In China, the fading support from China’s export and investment sectors, alongside the delays in the normalisation of consumption, has posed headwinds to the economic rebalancing process. ......
UK GDP contracted by 1.6% QoQ in Q1 2021 and remained 8.7% lower than at the end of December 2019. .....
Inflation has ticked up in many countries driven by energy prices, supply-chain bottlenecks and the demand rebound, which has revived concerns about economies ‘running hot’ .....'

Vanguard's response: 'What should investors do in response to these developments?
Many investors change their portfolios in a bid to take advantage of the latest news. However, it’s very difficult to time these changes effectively. In practice, shifting your portfolio in response to short-term events may lead to little more than increased trading costs.
At Vanguard, we believe that investors will usually be better served by identifying the appropriate asset allocation to suit their goals, then sticking with it and tuning out short-term noise.'

I think it's good to come away from a podcast like that, balanced enough that I don't know what they think, but hearing some things I need to think about to know what I should think.

tebbins

JohnWinder said:

It’s easy to find fault with anything that requires a subjective judgment, and anything can be improved, but I don’t/didn’t want to condemn it outright; rather, thought it could have been more balanced, and was more adult entertainment than enlightenment.
It started with how dominant VLS had become, praising its returns, transparency, costs, ‘accessibility’ to retail clients and attraction for advisors.
There was a throw away line at 04.40 that ’60/40’ will/might (can’t remember) ‘come back to bite them’.  We’ve discussed this matter here only recently, and I think a challenge to ’60/40’ could do with a rebuttal or questioning.
Their main concern with VLS was that it was sailing, perhaps blindly, into troubled waters with high P/E’s and low bond yields on long bonds, ignoring the chance to make some tactical changes or advising clients that their risks were rising. As you put it:

I don't see the lack of balance you do. It is right that the discussion should not only highlight the success of the strategy, but also caution that there are factors that could trip the strategy up in the future.

At that point my preference would have been to hear a challenge or questioning of this notion that you can anticipate market changes and be successful in picking where the future returns are.

Vanguard has a view on this, appearing in their recent quarterly economic report. Some extracts:

'Federal Reserve now expects to begin lifting interest rates from effectively zero in 2023, ....
In China, the fading support from China’s export and investment sectors, alongside the delays in the normalisation of consumption, has posed headwinds to the economic rebalancing process. ......
UK GDP contracted by 1.6% QoQ in Q1 2021 and remained 8.7% lower than at the end of December 2019. .....
Inflation has ticked up in many countries driven by energy prices, supply-chain bottlenecks and the demand rebound, which has revived concerns about economies ‘running hot’ .....'

Vanguard's response: 'What should investors do in response to these developments?
Many investors change their portfolios in a bid to take advantage of the latest news. However, it’s very difficult to time these changes effectively. In practice, shifting your portfolio in response to short-term events may lead to little more than increased trading costs.
At Vanguard, we believe that investors will usually be better served by identifying the appropriate asset allocation to suit their goals, then sticking with it and tuning out short-term noise.'

I think it's good to come away from a podcast like that, balanced enough that I don't know what they think, but hearing some things I need to think about to know what I should think.

VLS is intended to be a way for people to get a balanced portfolio of global index funds within a single funds. You can debate the merits of the 20/40/60/80/100 gaps vs say BlackRock mymap or Halifax Global Strategy, and you can debate the 20-25% UK weighting vs 4-5% in funds that don't up weight the UK, and the lack of real estate, commodities etc.
The idea of "active vs passive" investing is pretty dumb IMO. Investing is an action, pickings a fund is an active decision. I think calling index funds passive and as probably invented by active fund managers as a marketing term to denegrate index funds by creating a false dichotomy. Truly "passive" investing is impossible, like "100% pure water" or being 100% asleep or 100% awake. Investing is more nuanced than binary categorisation.

You seem to be saying the problem with VLS is that it isn't active. Again that's another truism, saying it adds nothing. VLS funds are not supposed to change their allocation because of what a fund manager thinks is going to happen in future. If investors themselves want to do that, they are welcome to and Vanguard have an ample offering of other more specific funds, and there are plenty of competitors.

As for the second para I made bold in the quote above, I have no idea what you're saying or what your point is.

Malthusian

I don't think active / passive is a false dichotomy. Either you believe that active fund managers can consistently beat the market and/or that it is possible to beat the market by picking the ones that are going to do well, or you don't. The latter will invest in the likes of VLS, BlackRock Consensus and L&G Multi-Index, or individual sector tracker funds in an asset allocation that they feel matches their risk profile, while the former will invest in Fundsmith, Woodf Lindsell Train, investment trusts, etc.

There are of course people who may hold some of their investments in VLS and the rest in active funds. So they have not fully bought into either idea and want some of their money in active funds just in case fund managers can beat the market. I call this "Christmas-and-Easter investing". The fact that some people half-believe in God doesn't change the fact that God can't half-exist.

(I'm deliberately ignoring areas like smaller companies where there are objective reasons to believe that active management is a good idea rather than blindly following an index that may include too much rubbish.)

As for the second para I made bold in the quote above, I have no idea what you're saying or what your point is.

I found it a very eloquent way of saying "That was thought-provoking".

Most podcasts leave their audience no more informed than they were at the start, either because they are totally partisan, or because they consist of two sides shouting at the wall behind the other. Either way the audience cheers on whichever side they agreed with at the start and finishes the podcast pleased to know they are still right. If the audience goes away musing about what they've heard the podcast has succeeded in a difficult job.

JohnWinder

I found it a very eloquent way of saying "That was thought-provoking".

Thanks for that. I was just about to post an apology for clumsy writing. Not any more.

tebbins

Malthusian said:

I don't think active / passive is a false dichotomy. Either you believe that active fund managers can consistently beat the market and/or that it is possible to beat the market by picking the ones that are going to do well, or you don't. The latter will invest in the likes of VLS, BlackRock Consensus and L&G Multi-Index, or individual sector tracker funds in an asset allocation that they feel matches their risk profile, while the former will invest in Fundsmith, Woodf Lindsell Train, investment trusts, etc.

There are of course people who may hold some of their investments in VLS and the rest in active funds. So they have not fully bought into either idea and want some of their money in active funds just in case fund managers can beat the market. I call this "Christmas-and-Easter investing". The fact that some people half-believe in God doesn't change the fact that God can't half-exist.

(I'm deliberately ignoring areas like smaller companies where there are objective reasons to believe that active management is a good idea rather than blindly following an index that may include too much rubbish.)

As for the second para I made bold in the quote above, I have no idea what you're saying or what your point is.

I found it a very eloquent way of saying "That was thought-provoking".

Most podcasts leave their audience no more informed than they were at the start, either because they are totally partisan, or because they consist of two sides shouting at the wall behind the other. Either way the audience cheers on whichever side they agreed with at the start and finishes the podcast pleased to know they are still right. If the audience goes away musing about what they've heard the podcast has succeeded in a difficult job.

Again I don't agree with this idea of the dichotomy. You're imposing a narrow belief that things are binary, one or the other. People don't work like to that, businesses don't work like that. Because someone uses managed or index funds doesn't mean they automatically take a side, or even care about the active/index debate. Index funds are in a way the ultimate active fund because you're buying the aggregate expression of every active buyer and seller rather than trying your luck with individual buys. You could just as easily call picking a fund manager blindly following them as an individual rather than the market as a whole.
Johnwinder kindly messaged me after to explain their position, I agree that the podcast seemed a bit inconclusive.

EdSwippet

tebbins said:
...

Index funds are in a way the ultimate active fund ...

Seriously?