LifeStrategy and Target Retirement funds, two chairs on a beach, Photo by Aaron Burden on Unsplash

Comparing Vanguard’s LifeStrategy And Target Retirement Funds

Like many investors, I have less fixed income in my portfolio than I should. Although I have some cash and property, so I am not completely at the mercy of the stock market, rock-bottom interest rates have long held me back from venturing too deeply into bonds.

Some of the investment trusts I own (Murray International, Acorn Income, and RIT Capital Partners) do hold fixed-income investments.

Even if I included these, which is dubious in the extreme, the resulting fixed-income element would only account for 3% of my overall portfolio.

I also have some renewables and infrastructure exposure within my portfolio, which I am hoping can provide some bond-like stability, but these are yet to be properly battle-tested.

But my lack of fixed income is definitely a weak spot, so it’s something I’m looking to address, albeit on a fairly gradual basis over the next decade or so. I like to plan ahead with these things as regular readers may have gathered.

Where investment trusts come up short

Unfortunately, for my purposes anyway, investment trusts don’t seem to cover this asset class that well. Most debt funds seem to specialise in niche and/or risky areas.

What’s more, many of them don’t have a particularly long track record and we’ve even seen a couple, namely Funding Circle SME Income and RDL Realisation, decide to call it a day. That doesn’t exactly inspire confidence.

My knowledge of the fixed-income market isn’t that great. I know some basics, but I feel much more inclined to go the passive investing route when it comes to this particular asset class.

A global bond index fund is certainly one option, but I’m also interested in Vanguard’s LifeStrategy and Target Retirement funds, so I decided to dig in to them a little more.

Both provide a mixture of both equities and bonds in one simple package. They are designed to automate your asset allocation, helping you resist the temptation of trying to time the market.

The LifeStrategy funds rebalance regularly, keeping a fixed proportion of equities and bonds.

The Target Retirement funds do much the same thing, but with the added feature of gradually moving more and more into bonds as you get older (as classic asset allocation theory dictates).

Why rebalancing works so well

The secret to a good asset allocation strategy is regularly rebalancing the proportion you have in each asset class.

Say you have 50% in equities and 50% in bonds. Let’s say that shares then have a good year, rising by 20%, but bonds produce a zero return.

This means your weighting would have shifted to 54.5% equities (60/110) and 45.5% bonds (50/110).

To rebalance, you would sell some shares and buy some bonds to restore your 50%/50% position.

The key point to note here is that you are (probably) selling shares when there are expensive. And you are (probably) buying bonds when they are cheap.

It’s all about taking advantage of reversion to the mean and the fact that shares, in particular, can produce wildly varying returns from year to year.

Of course, if you held fixed-income in an investment trust, there’s a decent chance the trust’s discount might widen considerably if the stock market had a major fall. Selling a little to rebalance your portfolio might not be nearly as effective in these circumstances.

LifeStrategy

Vanguard’s five LifeStrategy funds were launched in June 2011 here in the UK. They have a set percentage in equities with the balance in fixed income. You can have 20%, 40%, 60%, 80% or 100% in equities.

You can mix and match of course. For example, you could buy half LifeStrategy 40 and half LifeStrategy 60, if you wanted 50% in equities and 50% in bonds.




These funds have an ongoing cost figure of 0.22%. From a quick skim of the prospectus, there doesn’t seem to be a fixed rebalancing schedule. So, adjustments to keep the equity ratio at the correct level are made as and when required rather than, say, each quarter or year.

Target Retirement

The Target Retirement funds aim to make your investing life even simpler.

Rather than sticking with a fixed ratio of equity to bonds, they start off with a ratio of 80% equity/20% bonds. Then they very gradually move towards 30% equity/70% bonds over the course of three decades.

There are several funds, with a range of retirement dates from 2015 to 2065, with five-year gaps in between. The idea is that you pick the retirement date that most closely matches your own. As that date approaches, the fund moves more and more into bonds.

The shift towards bonds starts when the typical investor is aged 43, that is 25 years before the target retirement date. It accelerates a little when you are in your 60s, before flattening off when you reach 75.

Here is the retirement glide path, as it is rather grandly called:

Vanguard Target Retirement glide path for equity and bond allocations

The Target Retirement funds for 2045, 2050, 2055, 2060 and 2065 are all still 80% equities. The remaining funds currently have the following equity allocations:

  • 2040: 77%
  • 2035: 72%
  • 2030: 66%
  • 2025: 61%
  • 2020: 53%
  • 2015: 40%

These funds all have an ongoing cost figure of 0.24% so the one extra step of automating your asset allocation makes it marginally more expensive than the LifeStrategy funds.

The 2015 to 2055 funds were launched in December 2015, and the 2060 and 2065 funds in December 2017.

Comparing the two

The Target Retirement and LifeStrategy funds invest in a very similar fashion and broadly use the same underlying funds.

What is a little surprising is the difference between how much is invested in each of them.

The LifeStrategy funds had £12.3bn of assets when I did the research for this article. LifeStrategy 60 is the most popular, no doubt due to the fact that 60% equities/40% bonds is typically the default recommendation for asset allocation.

LifeStrategyAssets
LS100£1.1bn
LS80£2.3bn
LS60£4.8bn
LS40£3.2bn
LS20£0.9bn

The LifeStrategy funds have over 100 times more in assets than the Target Retirement funds. Combined, the eleven Target Retirement funds have collected just £122m.

Target
Retirement
Assets
2065£0.4m
2060£0.5m
2055£6m
2050£7m
2045£10m
2040£15m
2035£19m
2030£20m
2025£28m
2020£13m
2015£3m

I was amazed by how small these figures were. The Target Retirement funds haven’t been around as long, especially the 2060 and 2065 versions, but still.

In the US, Vanguard’s Target Retirement funds typically have tens of billions of dollars of assets and seem to be more popular than the LifeStrategy funds.

The bias to the UK

LifeStrategy 60 and Target Retirement 2025 both have 60% in equities at the moment, so they are fairly easy to compare.

While their holdings aren’t identical, the differences are quite small and largely cosmetic. For example, Target Retirement held both FTSE 100 and FTSE All-Share funds while LifeStrategy had just FTSE All-Share.

Both funds do have a significant bias to the UK, though, as this breakdown of LifeStrategy 60 by assets shows:

Vanguard LifeStrategy60 underlying asset classes




UK equities account for 15% (a quarter of the 60% held in equities) of this fund, whereas if a strict global weighting was applied this figure would be around 4%.

Likewise, UK fixed-income is 13% compared to around 3% under a strict global weighting.

According to Vanguard, “the allocation … is adjusted from a pure global market cap weighting to a heavier weighting in broadly diversified UK equities and bonds to reflect investors’ desire to hold more domestic assets, as well as to balance diversification requirements and investor costs”.

Now, that sort of UK bias is pretty close to my current portfolio but it’s definitely something to be aware of. Retirees may not be spending their cash in pounds, of course, depending on what plans they have.

According to a recent article in the Telegraph, it’s likely that both the UK weighting of these funds and their charges will come down in the coming years.

The US versions of the LifeStrategy funds have charges of 0.13%. I’m not sure the UK versions would ever get that low, but it would be good to see them reaching the high teens.

The DIY route is a little cheaper

If you were to create these funds yourself by buying all the sub-funds that Vanguard uses, then I calculate the average ongoing cost figure would be 0.15%.

Its equity funds range from 0.08% to 0.25% and the bond funds from 0.15% to 0.30%.

The key thing here is whether you trust yourself enough to rebalance any individual holdings you have when the need arises.

Another consideration could be whether you hold outside of an ISA or SIPP. Without the protection of these wrappers, rebalancing could incur some capital gains tax.

Performance

Of course, we shouldn’t pick funds like this on the basis of performance. But it’s useful to see just what the difference might be, as well as how much your returns might vary from year to year.

The income angle

Again, income probably isn’t something that should be top of your list when it comes to choosing these sort of funds.

For what’s it’s worth, the yield on the LifeStrategy funds goes from 2.0% (LS100) to 1.5% (L40).

The Target Retirement funds are 1.5%/1.6%, although Target Retirement 2020 is 1.3% and 2015 is 0.8%.

Therefore, if you are planning to live off these funds in retirement, you’d probably need to sell some units periodically to top-up the dividends paid out.

Wrapping up

I still like the idea of these funds, and I think the marginal extra cost over bog-standard index funds is worth it to ensure your rebalancing needs are automated.

For me, ending up with 70% in bonds via the Target Retirement route seems rather too cautious, although I suspect I would still have other investments so the proportion of my total portfolio in fixed income would be a lot lower than that.

Of the two, I think I am more likely to take the LifeStrategy route, putting an increasing amount of my portfolio into it over a fairly long period of time as I sell out of other holdings. Hopefully, both the cost and the UK allocation will have been reduced by then.


Note that I may own some of the investments mentioned in this article. You can see my current holdings on my portfolio page. Nothing in this article should be regarded as a buy or sell recommendation as this site is not authorised to give financial advice and I'm just a person writing a blog. Always do your own research!


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11 Replies to “Comparing Vanguard’s LifeStrategy And Target Retirement Funds”

  1. Hi ITI how do bond returns compare to best buy fixed term cash isa’s. I’m guessing they’re about the same, with bonds having the edge, but isa’s being tax free. Difficult finding a clear comparison. Thanks

  2. Hey Adam. I’m not sure if I have seen any specific research on fixed-rate ISAs vs bonds. Of course, you can put a bond fund into an ISA, so the fact that fixed-rate ISAs are tax-free may not give them an advantage in that case.

    Most people refer to the long-term asset return studies produced by the likes of Barclays and CSFB when comparing asset classes like these. And they generally show bonds usually perform slightly better than cash, but are more volatile from year to year.

    For example, you can see the UK returns of shares, bonds and bills (bills are essentially cash/savings accounts) on page 35 of the latest CSFB report: https://www.credit-suisse.com/corporate/en/articles/news-and-expertise/global-investment-returns-yearbook-201902.html

    Bonds have done better over the very long term — 1.8% a year versus 1.0% for cash. But since 2000, the difference is much greater at 4.1% for bonds vs 0.4% for cash, because the fall in global interest rates has given bonds an unusual tailwind these past few decades. Those figures are all after taking account of inflation by the way.

    The former set of figures is probably a better guide as to what to expect going forward. That said, while it’s helpful to see what’s happened in the past, the future could be very different!

  3. Thanks for the comparison IT.

    I hear Vanguard UK are actively looking to reduce the weighting to UK A/Share Index and I would hope for something nearer to 15% rather than 25%. I think it was 33% when launched in 2011.

    I have been pleased with the performance of Lyxor Green Bond ETF since purchase in February…early days. I have asked Vanguard to offer a Green Bond option for UK investors. They say they will look into it.

  4. It’s a shame the Vanguard target retirement date funds don’t provide a gradual rising equity glide path sometime after the retirement date. Recent research has shown this can be effective at combating sequence of return risk.

    One reason could be that until relatively recently, common practice was to simply purchase an annuity upon retirement, whereas now people are looking at drawdown (obviously the FI community have been looking at safe withdrawals for some time).

  5. Info only-Vanguard Global Bond Index Fund hedged to the Pound has produced 5%pa return over the last 10 years
    Figures from Vanguard web site
    xxd09

  6. For ETF users: you may like to know that the Vanguard Global Bond Index £ hedged is now available, code VAGP. It distrubtes monthly and has an OCF of .1%

  7. The retirement funds may not be popular due to the same phenomenon noted in another article in FT this week. The phased approach to retirement rather than a fixed date. Perhaps the product is not in tune with the market.

    I hold 60/40 LS in an ISA and I am happy with that decision.

  8. I recollect reading that Life Strategy rebalances daily.
    The yield is low on these funds, because an element of the income is reinvested, within (some)underlying accumulation units, in the fund, regardless of whether you hold income or accumulation units. ( I phoned Vanguard to verify this)

  9. Thanks for all the comments. Good to see plenty of folks have been kicking the tyres on these funds.

    @diy investor (uk)… 15% sounds like a reasonable number to me. It’s about three times the natural weighting, but close enough I think for UK-based investors. I wasn’t aware it had started as high as 33%, though. I think it would be useful if Vanguard laid out its plans here a little more publicly on its website, even if it was vague targets/timeframe that it said were not set in stone. I know there was some commentary in that Telegraph piece you tweeted recently, but that’s pretty much the only time I have seen this discussed (I haven’t been following these funds closely, so maybe it has been covered and just haven’t seen it). And +1 for more environmentally friendly options obviously.

    @CisforV… I haven’t seen that particular research but I would guess it might confuse things a little if there were a variety of Target Retirement funds with different glidepaths. I suspect that if Vanguard see demand for advisers and investors for that sort of thing, though, they may well respond to it.

    @Chris… That’s certainly possible. It definitely struck me as odd that the situation in the US was so different. I’m not sure of the history there — maybe the TR funds were launched first.

    @Andrew… that is interesting. Thanks for pointing that out. https://www.vanguardinvestor.co.uk/investments/vanguard-global-aggregate-bond-ucits-etf-gbp-hedged-distributing

    @Colin… I’m surprised it’s daily, but I guess as Vanguard is merely altering the allocations between its own funds, that means the trading costs of rebalancing that frequently are minimised.

  10. Great comparison, IT Investor. I’ve found that LifeStrategy is a decent choice for lazy investors like myself. The emerging markets allocation is lower than my target one so I’ll usually top it up with FTSE emerging (VFEM) and Dev world ex-UK to lower the home bias.

    Also, a fellow IT investor. Keep up the good work 😉

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