Single multi-asset funds offer investors a potential all-in-one solution. Typically made up of a mix of shares and bonds, they provide investors with an instant (and constantly) balanced portfolio that is broadly diversified and designed to give them the best chance of attaining their long-term financial goals.

Vanguard’s own multi-asset funds, led by our LifeStrategy range, took in a record amount of money from investors in 2020. This includes from people like me, as well as members of my family.

Having been launched ten years ago, our LifeStrategy range of funds in the UK have since seen their assets under management grow to more than £32 billion¹.

But can a single multi-asset fund really tick all the boxes? Can such an apparently simple solution really cater to investors’ needs?

We believe they can but not all multi-asset funds are created equal. So it’s important to get a proper understanding of what a fund is made up of and how it is managed.

Finding the right fund

Picking an all-in-one fund is much like many other decisions in life. Whether it’s buying a house, choosing a nursery for your children or planning a holiday, it can be surprisingly difficult to find something that ticks all the boxes around quality and cost.

Finding the right fund is not all that different and it may in fact be a little easier.

In keeping with our four investment principles – goals, balance, costs and discipline – the first step is to check that a multi-asset fund really is aligned with your goals. Multi-asset funds can have varying objectives, so it really comes down to being clear about your ultimate financial aim.

In my case, I’m invested in the LifeStrategy 80% equity fund, as my goals have a fairly long time-horizon, meaning I can tolerate higher levels of risk.

I can do this with our range of LifeStrategy funds because they offer varying splits of share-to-bond ratios to cater for different risk tolerances, time horizons and financial goals.

Investors nearing retirement, for example, may be more likely to require a fund with a very low risk profile – with only 20% invested in shares and 80% in bonds, say. Or maybe they’ve got more time and are happy to take on extra risk in pursuit of higher returns with a portfolio that is 80% made up of shares.

Making sure it’s diversified

Within that overall allocation, it is important also to look for multi-asset funds that offer broad diversification – that is, a sufficiently wide range of investments that effectively spread your risks.

If we look more closely at the LifeStrategy® 60% Equity Fund as an example, we can see that it provides investors with exposure to almost 50² countries and more than 26,700 unique holdings, including company and government bonds as well as shares.

Now that’s what we call diversification!

Keep your costs low

That ties in nicely with our next investment principle, which is to think about costs. Financial markets are unpredictable. The future is unpredictable. But cost is one thing that investors can control.

Our research has shown that low-cost funds have a higher probability of outperforming costlier peers, spanning both active and index strategies³. If the cost is high you simply get to keep less of your returns.

A benefit of Vanguard’s mutual structure in the US, where it is the fund owners who own Vanguard⁴, is that Vanguard’s interests are aligned with those of our investors globally, which includes keeping our costs low. This is core to everything we do; our aim will always be to pass as much as possible back to our investors.

Being disciplined

The last principle is a tricky one and often the hardest. Being disciplined about investing is something that even the most seasoned investors struggle with.

Part of that challenge is sticking with your asset allocation, which has been found to be the most important determinant of long-term investment success⁵. As time goes by, the original asset mix can drift because part of the portfolio will outperform.

For example, if shares outperform bonds, the share portion of the portfolio will gradually exceed the target allocation while the bond portfolio will diminish by the relative amount.

That’s why we advocate regular rebalancing, which is the process of actively readjusting the portfolio’s asset allocation to the intended mix. Some all-in-one multi-asset funds like our LifeStrategy funds, rebalance regularly using cash flows to minimise costs and maintain the desired asset allocation.

In addition to rebalancing thresholds, our funds employ a dynamic approach to rebalancing when markets are more volatile. For example, in March 2020 – when the Covid-19 pandemic was hitting markets – these rebalancing thresholds were moved slightly wider to avoid rebalancing in the wrong market direction.

The process is part of the evolution of LifeStrategy funds as we look to make the inner complexities more efficient. The alternative of a portfolio made up of different funds puts the onus on investors to manually rebalance portfolios.

Outwardly simple, inwardly complex

Investing in a single multi-asset fund is not necessarily basic. In the case of our LifeStrategy funds, their outward simplicity is intentional – we handle the inner complexities and difficult decisions on behalf of investors, which is part of their value as an all-in-one investment solution.

We believe that delivering value to investors isn’t just about cost, although cost is important. It’s also about providing high-quality investment solutions that help investors reach their financial goals.

All Vanguard funds follow the four principles for investment success but none more so than our LifeStrategy funds.

 

¹ Vanguard, 31 June 2021.

² Plagge, Walker, Hon and Corlett-Roy, 2021. “The case for low-cost index-fund investing”. Vanguard.

³ 47 countries, as of 30 June, 2021.

⁴ Vanguard Group, Inc. is owned by Vanguard’s US-domiciled funds and ETFs. Those funds in turn are owned by their investors. While VGI’s ownership structure can’t be replicated outside of the US (due to regulatory restrictions), we believe that this mutual structure aligns Vanguard’s interests with those of our investors globally.

⁵ Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, 1995. "Determinants of portfolio performance." Financial Analysts Journal 51(1):133–8. (Feature Articles, 1985–1994.)