Vanguard Target retirement funds for SIPP

RSVMark

Hi All
MSE newb here but reasonably familiar with pensions, SIPPs etc. I am in my mid 50s and have a decent pot so far - and am continuing to save hard with SIPP contributions alongside employer DC scheme.

All my current investments in pensions are a mix of OEIC funds that are active. I am thinking about beginning to de-risk by investing into Vanguard Target retirement fund. These are passive and are a mix of OEICS and bonds targeting a specific year. As that year approaches, the fund changes composition and goes to more bonds and less funds.

The funds are passive so attract lower fees and the OEIC elements tend to be trackers. 

Does anyone have some independent advice (I have an IFA but would prefer not to involve him) and experience of these products they are happy to share? 

engagedandopen

The Vanguard TRFs have a pretty static long-term allocation to trackers.  I think they review them once a year.  And you either have to choose the nearest 5 year fund or blend two of them.  Have you looked at Aviva?  They have new target date funds that are matched precisely to your retirement year.  A bit more expensive, but more actively managed as markets move.  Plus, you could transfer in your active OEICs alongside the default, and switch or sell at favourable times.

leosayer

You won't get advice on this forum but you will get opinion!

Such target date products are an interesting idea but I've yet to see any analysis that says such funds offer better risk-adjusted returns than a typically 60/40-style portfolio or fund which is periodically rebalanced, like Vanguard's own LifeStrategy funds.

With rebalancing on the LifeStrategy funds, if there's an equities crash then the bond portion would be sold and equities bought to bring the fund back into balance. In other words, you buy equities cheap and potentially increase your future returns.

What worries me about target date funds is, what happens if the equity crash coincides with a shift from (say) 60/40 to 50/50? Potentially you would be locking in the losses by changing the allocation at precisely the wrong time.

My own way of managing this has been to invest 100% equities until I get within sight of retirement and then direct all my future contributions to bonds and cash funds.  

RSVMark

engagedandopen said:

The Vanguard TRFs have a pretty static long-term allocation to trackers.  I think they review them once a year.  And you either have to choose the nearest 5 year fund or blend two of them.  Have you looked at Aviva?  They have new target date funds that are matched precisely to your retirement year.  A bit more expensive, but more actively managed as markets move.  Plus, you could transfer in your active OEICs alongside the default, and switch or sell at favourable times.

Thanks. I have selected a nominal date/year but tbh it depends on the overall performance of my various pots. If they perform well, I'll pull the trigger earlier. So performance is actually more important to me than precision. Part of that performance is me starting to de-risk which is why I am thinking about these. I called Vanguard who told me they are actually actively managed (despite the small fee) and changes are made as required to the composition of each fund. I agree, I could blend if I wanted. Thanks for the tip on Aviva, I will take a look. In regard to transferring in, I have a fairly decent OEIC within the same SIPP wrapper so when the time is right, I could simply cash that in and move. 

Albermarle

Hi welcome to the forum.

MSE newb here but reasonably familiar with pensions, SIPPs etc. I am in my mid 50s and have a decent pot so far - and am continuing to save hard with SIPP contributions alongside employer DC scheme.

Is there are a specific reason why you are contributing separately to a SIPP, as well as your employer scheme?

All my current investments in pensions are a mix of OEIC funds that are active

Most regular contributors to the forum, are not convinced that actively managed funds outperform passively managed ones, so not worth the extra charges. Although there are some more niche areas where they can be useful ( all opinion only of course)

Regarding Target Retirement funds or any similar lifestyle funds aimed at drawdown. In general they seem to derisk too far. Although the Vanguard one is holding 50% equities around age 63, which is typical, it keeps dropping as you get older, which I do not think is a normal drawdown strategy ?

Also you should not see a pension in isolation from other investments, pensions and cash savings. For example if you have a lot of cash you can afford to take a bit more risk in your pension.

RSVMark

leosayer said:

You won't get advice on this forum but you will get opinion!

Such target date products are an interesting idea but I've yet to see any analysis that says such funds offer better risk-adjusted returns than a typically 60/40-style portfolio or fund which is periodically rebalanced, like Vanguard's own LifeStrategy funds.

With rebalancing on the LifeStrategy funds, if there's an equities crash then the bond portion would be sold and equities bought to bring the fund back into balance. In other words, you buy equities cheap and potentially increase your future returns.

What worries me about target date funds is, what happens if the equity crash coincides with a shift from (say) 60/40 to 50/50? Potentially you would be locking in the losses by changing the allocation at precisely the wrong time.

My own way of managing this has been to invest 100% equities until I get within sight of retirement and then direct all my future contributions to bonds and cash funds.  

Thanks @leosayer
Noted and I smiled at the advice vs opinion! At the moment I am 100% equities so wanting to start that transition to a more balanced portfolio. I think I understand the 'what if' scenario of the equity crash, but equally, hasn't the bond market been historically poor? (Not that I am an expert but are there seems to be risk on both sides?)

As far as I understand it, the Target fund is actively managed so I presume they might compensate in a similar manner to a crash. As far as I understand it there is a gradual shift in the year so they dont 'jump' from 60/40 to 50/50 suddenly - its managed over that 5 year period. As you buy more in the fund, you buy at the prevailing composite split at the time of the transaction.


I have tabulated the historic returns to look at numbers and splits. Fees for Target years are 0.24% while life strategy is 0.22%. I guess they are similar products insofar they split bonds and equities but the key difference is that one is actively winding down for you. Depending on how far out your target year is, you may benefit (or take the risk) on higher equity proportions. Whereas the life strategy product is fixed. Sure you could sell off a fixed life strategy 60/40 and buy a 40/60 in a self managed approach but that brings in trading fees and timing anxiety.

Your last comment is really valid though. However, I've really struggled to find information on 'funds' that are composed of cash and bonds. Do you have any opinions of where a good source of information is? 

dunstonh

As far as I understand it, the Target fund is actively managed so I presume they might compensate in a similar manner to a crash. 

That is not correct.  It is an active fund but it uses underlying passives and makes no adjustments for short term issues.

As far as I understand it there is a gradual shift in the year so they dont 'jump' from 60/40 to 50/50 suddenly - its managed over that 5 year period. As you buy more in the fund, you buy at the prevailing composite split at the time of the transaction.

That is a risk.  It removes any discretion from the equation. i.e. it does it regardless of your needs or market conditions. e.g. markets fall 35%.   Rather than sit tight to let it recover, the equity reductions will start locking in your losses on that asset class.

Remember, that the world is bigger than Vanguard.  Other fund houses can beat them on cost and performance (performance is historic and not forward looking but VLS has been behind others for very many years now).    I have some Vanguard funds in my own portfolio but I have others as well as Vanguard are not the best in every area.  no fund house is.

Pat38493

I was watching a youtube from one of those channels who is also an IFA - it was one of those "top 5 things you can do to help your retirement plan" or whatever.

One of them was "switch off lifestyling on your pension and take control of it yourself".

Vanguard TRFs are basically lifestyling funds...

RSVMark

Thanks @Albermarle

Albermarle said:

Is there are a specific reason why you are contributing separately to a SIPP, as well as your employer scheme?

Yes, I have maxed out my % with work (9% of salary which is matched by my employer) and recently paid off the mortgage so I have ‘spare’ cash. I am saving as hard as I reasonably can to both make my retirement as comfortable as possible combined with some flexibility as to when I decide to retire.

Most regular contributors to the forum, are not convinced that actively managed funds outperform passively managed ones, so not worth the extra charges.

I am aware of this opinion and definitely want to balance the risk out with some actives and some passives. 

Also you should not see a pension in isolation from other investments, pensions and cash savings. For example if you have a lot of cash you can afford to take a bit more risk in your pension.

I am lucky insofar as I have some cash, a rainy day fund for emergency and a decent income. I have a few pension pots Inc current company and previous company dc schemes and the Sipp was set up to self manage and be destination for the spare (mortgage) money. 

@dunstonh
@pat38493

 Thanks and points noted. I am clear that my objective is to de risk by moving into bonds. Interesting to hear your views on V performance and fees so if there are better products or fund houses out there, I don’t know where to look. Out of interest how far underperforming do you think they are? Are they 95% as good or utterly rubbish and only half as good?

@leosayer has a diy approach (which may be better) in selecting your own bonds and cash funds….. but again, my lack of knowledge on where to look to select these is letting me down…… which brings me back to the V products…. It’s an easy win and if it’s 95% as good, it appears to solve the immediate objective. 

jamesd

leosayer said:

With rebalancing on the LifeStrategy funds, if there's an equities crash then the bond portion would be sold and equities bought to bring the fund back into balance. In other words, you buy equities cheap and potentially increase your future returns.

Unlikely. They rebalance far too frequently for that. If you want this, use different bond and equity funds.

jamesd

Albermarle said:

Most regular contributors to the forum, are not convinced that actively managed funds outperform passively managed ones, so not worth the extra charges. Although there are some more niche areas where they can be useful ( all opinion only of course)

Then most need to read the FCA funded research which found that in most areas active outperformed passive for UK investors. The US being the most prominent exception, a niche area where the passives can be useful. Similar for others with high US component, like global large cap.