The UK's Ten Largest 60%-80% Allocation Funds Control Over £35 Billion Of Investors' Money. Every Single One Underperforms A Simple Two-Index Passive Benchmark. Vanguard's LifeStrategy 80% Equity Fund Is The Largest Culprit.
If you work in the financial industry, you might not want to hear this.
In my December 2022 paper, “Is Your Investment Manager Good Value” (downloadable here), I explained how a locus of passive index portfolios (PIPS) makes an easy 'at-a-glance' way to compare multi-asset funds. My research also showed that only 1% of GBP multi-asset funds outperformed a two-index passive benchmark on a risk-adjusted basis (sample: all 601 Multi-Asset GBP Funds from the Citywire Selector website, with at least 10-years of performance data).
Today I’m going to look at the UK’s 10 largest multi-asset funds in the Morningstar ‘GBP 60-80% Equity Allocation’, as listed on the FT website.
To see this list, go here, then select ‘Investment Focus’, category ‘Allocation’, scroll down to ‘GBP 60%-80% Equity Allocation’. Hit ‘Go’. Sort the results by Total Net Assets, largest first. Here’s the results:
Table: UK’s Ten Largest GBP 60%-80% Equity Allocation Funds
Plotting Versus the PIPS GBP Line
Chart: UK’s Seven Largest GBP 60%-80% Equity Allocation Funds (Having 5-Year History), Plotted Together With The GBP PIPS Line. Click to enlarge.
ALL seven of these multi-asset funds underperform the PIPS index on a risk-adjusted basis (i.e. inferior returns for an equivalent volatility).
Sidenote: What Difference Does Choosing The Right Core Portfolio Make?
- EITHER - over-allocate to other, more risky, assets in order to 'make up the difference' in total portfolio returns,
- OR - accept your portfolio delivering sub-par returns as the price of maintaining your volatility target.
Quick Look At The Mercer Funds
Chart: Three Largest Mercer GBP 60%-80% Equity Allocation Funds, Plotted Together With The GBP PIPS Line. Click to enlarge.
ALL of the Mercer multi-asset funds underperformed the PIPS index on a risk-adjusted basis.
How Does Vanguard LifeStrategy 80% Equity Fund Perform Against A Passive Benchmark?
Chart: Vanguard LifeStrategy 80% Equity Fund Asset Allocation Variation
- Vanguard's Lifestrategy 80% Equity GBP fund has 14 components, and is rebalanced daily (as per their literature).
- Walkers-PIPS-GBP-Tracker-75E (75% Equity) has just 2 components, and is rebalanced annually. (Tracker being an investible version of the index, more below.)
Vanguard Fund Plotted Against The PIPS Line
Chart: Vanguard LifeStrategy 80% Equity GBP 80% Equity Fund, Plotted Together With The GBP PIPS Line - 5 Years. Click to enlarge.
Chart: Vanguard LifeStrategy 80% Equity GBP 80% Equity Fund, Plotted Together With The GBP PIPS Line - 10 Years. Click to enlarge.
To bring us to the real (investible) world, we create the PIPS-75E tracker thus: 75% iShares Core MSCI World GBP (ISIN:IE00B4L5Y983) + 25% Vanguard Global Bond Index Hedge GBP (ISIN:IE00B50W2R13); rebalanced just once annually in January.
Chart: 12-Year Performance: Vanguard LifeStrategy 80% Equity Fund GBP vs Walkers PIPS Tracker 75E GBP. Click to enlarge.
We can see that over the last 12 years, the Vanguard fund returns have underperformed the PIPS-75E tracker by 27%.
Here's a table comparing the performance for different periods: