Vanguard LS vs buying the underlying funds

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marlot
marlot Posts: 4,938 Forumite
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Novice investor here.

As I understand it, the Vanguard Life Strategy series are funds of funds. They have an OCF of 0.22%. Plus some transaction costs of about 0.05%.

When I look at LS80, Vanguard describe the funds, and their current allocations. So LS80 is 19.3% invested in Vanguard FTSE UK allshare index trust, for example.

When I look through those underlying funds, they seem to have OCFs in the region of 0.06% to 0.23%.

So if I simply invest in the underlying funds, my average OCF seems to be about 0.13%. So making a saving.

Is this right, or have I missed something?
«134567

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  • Rich1976
    Rich1976 Posts: 532 Forumite
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    Spot on

    I did a similar calculation recently as was also considering holding the individual funds in the same percentage as LS100 .

    The downside is to maintain the relevant split and to stop the investments tilting too much in favour to the best performing fund you would need to rebalance every so often.

    Still not made my mind up.
  • SonOf
    SonOf Posts: 2,631 Forumite
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    So if I simply invest in the underlying funds, my average OCF seems to be about 0.13%. So making a saving.

    Correct. With fund of funds, you are paying for a fund manager or process that makes management decisions. e.g. sector/asset weightings and rebalancing. So, it is an extra layer of charges.

    However, if you build a portfolio of single sector funds, you will need to take on the responsibility of controlling the strategy and structure and the ongoing work.
  • badger09
    badger09 Posts: 11,247 Forumite
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    marlot wrote: »
    Novice investor here.

    As I understand it, the Vanguard Life Strategy series are funds of funds. They have an OCF of 0.22%. Plus some transaction costs of about 0.05%.

    When I look at LS80, Vanguard describe the funds, and their current allocations. So LS80 is 19.3% invested in Vanguard FTSE UK allshare index trust, for example.

    When I look through those underlying funds, they seem to have OCFs in the region of 0.06% to 0.23%.

    So if I simply invest in the underlying funds, my average OCF seems to be about 0.13%. So making a saving.

    Is this right, or have I missed something?

    The main thing you have missed is that, having decided on your preferred mix of funds, allocations to various geographies/equities/bonds etc, you will have to factor in the costs of regular rebalancing back to your chosen allocations.

    There will be costs to do that, both financial & in terms of your time. The attraction of the Lifestrategy funds of funds is that all that rebalancing is done for you.

    EDIT: beaten by 2 with faster typing speeds
  • sebtomato
    sebtomato Posts: 1,109 Forumite
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    You can indeed make a saving on fund management fees by purchasing the underlying funds as opposed to the pre-made LifeStrategy one.

    However, you will then need to do the rebalancing yourself progressively and also it may not be as tax efficient (many LS funds pay dividends as opposed to interest, even if they contain bonds. Dividends can be less taxed than interests for some people).
  • Linton
    Linton Posts: 17,219 Forumite
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    marlot wrote: »
    Novice investor here.

    As I understand it, the Vanguard Life Strategy series are funds of funds. They have an OCF of 0.22%. Plus some transaction costs of about 0.05%.

    When I look at LS80, Vanguard describe the funds, and their current allocations. So LS80 is 19.3% invested in Vanguard FTSE UK allshare index trust, for example.

    When I look through those underlying funds, they seem to have OCFs in the region of 0.06% to 0.23%.

    So if I simply invest in the underlying funds, my average OCF seems to be about 0.13%. So making a saving.

    Is this right, or have I missed something?


    You are talking about a possible difference of 0.1% or less. So with a £100K portfolio that is £100/year (do you have a £100K portfolio?) or £10/year for a £10K portfolio. Match that against the effort of continual rebalancing and possible platform transaction charges to do that should you opt for a cheap platform, or the higher platform annual charges if you dont, it seems to me that there are better uses of your time.


    Perhaps you should set up a dummy portfolio of the individual constituents of VLSxx and see what happens.
  • Albermarle
    Albermarle Posts: 22,367 Forumite
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    I think the law of diminishing returns applies here.
    VLS funds or similar are already low cost. The effort needed to shave off another 0.1% is not worth it, and as Linton says your time is probably better spent on something more productive, Like maybe earning more money to put into the fund !
  • Alexland
    Alexland Posts: 9,668 Forumite
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    Rather than build out a full set of the VLS underpinning funds - once the account valuation gets large enough that the OCF difference is a material cost (and by then you may have left Vanguard Investor for a fixed or capped price platform with trade fees to consider) consider a 2 fund portfolio of a good All World equities and a good diversified and hedged global bond fund/etf.
  • bostonerimus
    bostonerimus Posts: 5,617 Forumite
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    Don't use VLS as a direct model. Just buy a global equity and bond index and then maybe indexes in a few more focused areas if you want to, but keep the number of funds fairly small, 5 or 6 max so you can easily rebalance. That way you are plenty diversified and you should save a bit on fees.
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • Rich1976
    Rich1976 Posts: 532 Forumite
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    I have just read Reset by David Sawyer and he suggests a split of about 6 index funds at various percentages and then to rebalance accordingly
  • Alexland
    Alexland Posts: 9,668 Forumite
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    Obviously rebalance, but why does he suggest 6?

    If you have a small account on percentage fees then the OCF differences are negligible so its not worth doing - just stick to a multi asset fund.

    If you have a large account then OCF differences are material but so are trade fees (on contributions and rebalancing) on a capped or fixed price platform so it's worth splitting out but to the minimum number of holdings - either 2 (All World and bonds) or maybe 3 (World, EM and bonds) as All-World funds still command a premium on the weighted average of 90% World and 10% EM fund charges.

    I am genuinely interested in why he thinks 6 is better?

    Alex
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