Vanguard’s £35bn UK Life Strategy funds range has been wrongfooted by simultaneous falls in bonds and stocks this year, leaving supposedly low risk portfolios nursing heavier losses than racier options.
The investment behemoth offers a range of funds that aim to provide passive exposure to global markets, and it encourages investors to select a higher allocation to bonds if they have a lower tolerance for losses.
So far this year, however, a lower-risk fund with a 20 per cent equity weight has lost 16 per cent, whereas a more adventurous option with 80 per cent stocks is only down 9 per cent, according to Morningstar data.
The hit to bond-heavy portfolios has been worse in the UK where fixed income has fallen more than global peers following the “mini” Budget at the end of September.
“It’s true to say that investors would generally expect lower-risk portfolios to perform relatively better when markets are performing badly,” said James Norton, head of financial planners at Vanguard UK.
“Exceptions do happen, and this year is essentially one of those exceptions,” he added.
The topsy turvy period for Vanguard’s fund range is a prominent example of how the twin falls in stocks and bonds this year have upset conventional investment wisdom across the funds industry with harsh consequences for some retail investors.
Norton said he has a “huge amount of sympathy” for investors facing losses, but said the company’s research shows investors get better long-term returns by not reacting to or trying to anticipate short-term market moves.
“When times are tough, human nature sets in. It feels like something is broken but it’s not,” he said. “Changing now, Vanguard would strongly urge, is not the right thing to do, whether you’re in Life Strategy or another portfolio that you built yourself.”
The Life Strategy funds are designed to give exposure to global stocks and bonds based on their relative size, but with a tilt towards the home market for US and UK investors. The funds sold to British clients have a 35 per cent bias towards UK fixed income, leaving them more exposed to the shockwaves from recent political upheaval.
Vanguard’s target-date retirement funds, which automatically tilt more towards bonds as they move closer to the client’s retirement date, were similarly afflicted. Funds with closer retirement dates lost more than those with longer horizons.
Vanguard has made inroads in the UK markets since it started selling funds directly to British buyers in 2017, adding 100,000 new clients so far this year. Life Strategy funds were three of the top five most-bought funds on Interactive Investor, the second-largest UK platform for DIY investors, in the first nine months of the year.
So-called “balanced” portfolios that mix bonds and equities are a mainstay of the funds sector, on the basis that the counterweight of safe-haven fixed income will limit losses during downturns in the equities market.
Kevin Doran, managing director at investment platform AJ Bell, said balanced portfolios across the sector have suffered as central banks shift from an era of easy money and try to fight inflation.
“For a typical cautious portfolio with 80 per cent bonds, the theory is that a fall of more than 12.5 per cent should happen less than once in a hundred years. But in reality that is exactly what we’ve seen happen,” he said.
Vanguard said its global investment committee had examined the unusual twin falls in bonds and equities this year, but concluded that in the long run the two types of securities were likely to revert to their normal pattern of moving in opposite directions.
“We don’t change the asset allocation unless there is a fundamental shift in the market over the long term . . . We don’t think this positive correlation is the new norm,” said Mohneet Dhir, investment product manager, Life Strategy. “We are not moving the goalposts.”