UK bias in VG LifeStrategy and Retirement funds (UK)

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steveyg50
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UK bias in VG LifeStrategy and Retirement funds (UK)

Post by steveyg50 » Sun Jul 14, 2019 4:14 pm

For the UK investor - looking at the make up of the various VG LifeStrategy and Retirement funds, the equity proportion of these funds is approx 20% to 25% UK.

For comparison the VG FTSE global all cap fund has approx 5% UK, which seems more sensible. Also the VG FTSE all World and Developed world ETF have 5 or 6 % UK. I believe UK proportion of world stock market is something like 5 or 6 %?

So this seems like an extremely high UK bias in those blended funds.
Is there any reason for this home country bias? Is it sensible?

magneto
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Re: UK bias in LifeStrategy and Retirement funds

Post by magneto » Sun Jul 14, 2019 4:29 pm

steveyg50 wrote:
Sun Jul 14, 2019 4:14 pm
For the UK investor - looking at the make up of the various VG LifeStrategy and Retirement funds, the equity proportion of these funds is approx 20% UK.
VG FTSE global all cap fund has approx 5% UK, which seems more sensible. Also the VG FTSE all World and Developed world ETF have 5 or 6 % UK.
So this seems like an extremely high UK bias in those blended funds.
Is there any reason for this home country bias? Is it sensible?
They may be following in the footsteps of the UK professional investing management guidelines which are more startlingly overweight UK, due perhaps to misplaced currency considerations?
Seems an imbalance generally, but perhaps more relevant today noting relative valuations. This investor is currently also overweight UK, but longer term would aim to drift back to Global weightings as relative normality returns.
If such an overweight UK Stocks not preferred, then strike out on own course and buy VWRL plus a selection from the iShares Bond range, which happens to be more comprehensive than the Vanguard UK Bond offerings.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

andrew99999
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Re: UK bias in VG LifeStrategy and Retirement funds (UK)

Post by andrew99999 » Sun Jul 14, 2019 9:50 pm

steveyg50 wrote:
Sun Jul 14, 2019 4:14 pm
So this seems like an extremely high UK bias in those blended funds.
Comparing to the rest of the world's home bias, I wouldn't classify 20-25% as "extremely high". I would even go and call it moderate.
steveyg50 wrote:
Sun Jul 14, 2019 4:14 pm
Is there any reason for this home country bias?
Most likely currency risk.
steveyg50 wrote:
Sun Jul 14, 2019 4:14 pm
Is it sensible?
both sides are arguable. There are pros and cons. Impossible to give a silver bullet answer of yes or not.
You may need to look up further on currency risk to make a decision.

In general, if you will retire with a paid off house, and retire at normal retirement age and therefore with a fairly high ratio of bonds (denominated in your home currency), then not necessary.

If you retire early, therefore a lower percentage of bonds, and retire without a paid off house and have more liabilities in your home currency, then currency risk may be more of an issue you should take into consideration.

Topic Author
steveyg50
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Re: UK bias in VG LifeStrategy and Retirement funds (UK)

Post by steveyg50 » Mon Jul 15, 2019 12:01 pm

Ah I see, you think it's largely currency risk.
Fair point.
I wondered if there were other reasons... I dunno... some incentives. tax benefits.... belief UK going to perform very well in future...

Well, all my bonds are in GBP and will have high bond proportion on retiring.

So looking at past performance (and guessed future performance ) of US and Global index funds compared to UK I am willing to take the currency risk. I am unwilling to have 20-25% UK equity which means I won't use VG blended funds. No big deal really. Perhaps getting nearer to retirement I could change that view.

Valuethinker
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Re: UK bias in VG LifeStrategy and Retirement funds (UK)

Post by Valuethinker » Tue Jul 16, 2019 11:10 am

steveyg50 wrote:
Mon Jul 15, 2019 12:01 pm
Ah I see, you think it's largely currency risk.
Fair point.
I wondered if there were other reasons... I dunno... some incentives. tax benefits.... belief UK going to perform very well in future...

Well, all my bonds are in GBP and will have high bond proportion on retiring.

So looking at past performance (and guessed future performance ) of US and Global index funds compared to UK I am willing to take the currency risk. I am unwilling to have 20-25% UK equity which means I won't use VG blended funds. No big deal really. Perhaps getting nearer to retirement I could change that view.
1. there would be no withholding tax on UK shares. That's worth something compared to losing say 15% on Irish domiciled funds investing in US stocks?

2. remember the FTSE is currency hedged, naturally.

Roughly speaking a 10% fall in GBP leads to a 6-7% rise in FTSE 100 due to the international exposure of the index (Royal Dutch Shell alone is c. 10% of the index). F100 is c. 82-85% of the FTSE All-Share. The FTSE250 (12%) has more domestic exposure.

You saw this on June 23-24 2016. The Brexit vote surprised the market and the GBP fell roughly 10% in roughly 1-2 hours. FTSE100 stocks proceeded to rise 6-7% in the next couple of weeks.

The big problem with the UK market is

- concentration - put in £100, get £10 of Shell, another £4 or so of BP; HSBC etc
- sectors - almost 0 technology (Sage) & heavy in oil& gas, tobacco, financial services, pharma, telecoms (Vodafone), mining - it's not a new economy index

3. UK is c 8% of world index?

My own view is that it's probably not optimal being 20-25%, but it's not going to be a huge drag on performance. 10% or 20% of underperformance costs you maybe (20-8) overweighting x 15% = c 1.8% of relative underperformance? And that is not likely to be repeated every year, unless UK is another Japan.

The problem in recent years has been being underweight USA and by definition underweight in technology (and overweight natural resources). If that relative performance trend reverses then the FTSE will outperform the US index, and all will be forgiven.

Strategically I'd bet on the USA, tactically I'd bet on the world ex USA.

xxd091
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Re: UK bias in VG LifeStrategy and Retirement funds (UK)

Post by xxd091 » Wed Jul 17, 2019 3:37 am

This is problem I noticed some time ago when I was going to simply my Portfolio as I got older
Vanguard is aware too-will they change the proportions? -probably not anytime soon-it seems to be what U.K. investors want.
I have had a Global Equities and Bond Portfolio for many years and am a U.K. investor
One fund only would be great for my wife and estate to handle(I am down to 3 funds now)
It might be my last major transaction to move all investments to a Life Strategy Fund for simplicity and when Portfolio outperformance is less of a factor due to my age
xxd091

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asset_chaos
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Re: UK bias in VG LifeStrategy and Retirement funds (UK)

Post by asset_chaos » Sat Jul 20, 2019 7:28 pm

steveyg50 wrote:
Sun Jul 14, 2019 4:14 pm
For the UK investor - looking at the make up of the various VG LifeStrategy and Retirement funds, the equity proportion of these funds is approx 20% to 25% UK.

For comparison the VG FTSE global all cap fund has approx 5% UK, which seems more sensible. Also the VG FTSE all World and Developed world ETF have 5 or 6 % UK. I believe UK proportion of world stock market is something like 5 or 6 %?

So this seems like an extremely high UK bias in those blended funds.
Is there any reason for this home country bias? Is it sensible?
The UK is not unusual in this. Vanguard has LifeStrategy funds in several countries. In each the home country's stocks and bonds are overweight relative to the global portfolio. Australian LifeStrategy funds are also around 25% Australian stocks and Australia is even less of the global market than the UK. I believe the reason Vanguard does this is primarily a marketing decision. Home bias is pervasive and strong. I believe Vanguard decided to not try and fight this particular battle, which is probably the right decision. Better to get people invested in low cost balanced index funds with some home bias, rather than in high cost managed funds, where there would still be the same---or even more--home bias.

However, the UK investor doesn't have to have so much home bias, if they want something else. You can do it with four funds, say, global stock market, global hedged bond market, UK stock index fund, UK inflation-linked bonds, with the latter two dialed to whatever amount of home bias makes you comfortable, e.g. 10% each. Not quite as simple as the one LifeStrategy fund, but not terribly complex either.
Regards, | | Guy

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steveyg50
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Re: UK bias in VG LifeStrategy and Retirement funds (UK)

Post by steveyg50 » Tue Jul 23, 2019 2:22 pm

Going off on a tangent - how come VG have no world (ex US) funds like they do in US? Neither do Fidelity.... are there any?

At the moment I put all my equity in VG Global all-cap. I'm not unhappy with the country % allocation, which looking at it near enough matches % of world stock market, but it would have been nice to have an ex-US fund to give easier choice in the matter. If I become unhappy with the US allocation and want more 'rest of world', I'll need to buy several funds, Europe, emerging etc....

TedSwippet
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Re: UK bias in VG LifeStrategy and Retirement funds (UK)

Post by TedSwippet » Tue Jul 23, 2019 2:56 pm

steveyg50 wrote:
Tue Jul 23, 2019 2:22 pm
Going off on a tangent - how come VG have no world (ex US) funds like they do in US? Neither do Fidelity.... are there any?
My guess would be, simply, not enough call for them. The primary market for any ex-<country> fund would be investors living in <country> and who want to offset or balance out any already-held local <country> stocks or a home country bias. So ex-US funds are aimed at US investors, ex-UK funds at UK investors, and so on.

If not for PRIIPs, a UK investor could buy US domiciled VXUS as an ex-US holding. That's marketed at and designed for US investors, but UK investors don't have the tax issues with US domiciled funds and ETFs that many other non-US persons have. However, PRIIPs has effectively put US domiciled ETFs off limits for most EU residents, UK included.

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asset_chaos
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Re: UK bias in VG LifeStrategy and Retirement funds (UK)

Post by asset_chaos » Tue Jul 23, 2019 4:42 pm

steveyg50 wrote:
Tue Jul 23, 2019 2:22 pm
Going off on a tangent - how come VG have no world (ex US) funds like they do in US? Neither do Fidelity.... are there any?

At the moment I put all my equity in VG Global all-cap. I'm not unhappy with the country % allocation, which looking at it near enough matches % of world stock market, but it would have been nice to have an ex-US fund to give easier choice in the matter. If I become unhappy with the US allocation and want more 'rest of world', I'll need to buy several funds, Europe, emerging etc....
Vanguard Australia has VGS indexed to MSCI World ex-Australia, which,even though the name says world, omits emerging markets. Still the Australian index investor can, with two funds, precisely express their preference for domestic/foreign stock split. If that's not available throughout global Vanguard, it's odd. But Vanguard has made many odd choices on what's available where, e.g. the total world fund that follows the FTSE global all-cap index is not available in Australia.
Regards, | | Guy

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steveyg50
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Re: UK bias in VG LifeStrategy and Retirement funds (UK)

Post by steveyg50 » Tue Jul 23, 2019 6:58 pm

asset_chaos wrote:
Tue Jul 23, 2019 4:42 pm
steveyg50 wrote:
Tue Jul 23, 2019 2:22 pm
Going off on a tangent - how come VG have no world (ex US) funds like they do in US? Neither do Fidelity.... are there any?

At the moment I put all my equity in VG Global all-cap. I'm not unhappy with the country % allocation, which looking at it near enough matches % of world stock market, but it would have been nice to have an ex-US fund to give easier choice in the matter. If I become unhappy with the US allocation and want more 'rest of world', I'll need to buy several funds, Europe, emerging etc....
Vanguard Australia has VGS indexed to MSCI World ex-Australia, which,even though the name says world, omits emerging markets. Still the Australian index investor can, with two funds, precisely express their preference for domestic/foreign stock split. If that's not available throughout global Vanguard, it's odd. But Vanguard has made many odd choices on what's available where, e.g. the total world fund that follows the FTSE global all-cap index is not available in Australia.
I just had a quick look at VG Australia - you have a world (EX US) ETF fund - Vanguard All-World ex-U.S. Shares Index ETF (VEU)

We have not got a world Ex US in UK. It is odd how VG round the world has different ideas.

clank
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Re: UK bias in VG LifeStrategy and Retirement funds (UK)

Post by clank » Tue Jul 23, 2019 8:42 pm

steveyg50 wrote:
Tue Jul 23, 2019 6:58 pm
I just had a quick look at VG Australia - you have a world (EX US) ETF fund - Vanguard All-World ex-U.S. Shares Index ETF (VEU)
This is true, though my understanding is that the VEU/VTS funds offered in Australia are just thin wrappers around the equivalent US funds. They're domiciled in the US, so many Australian investors avoid them because they'd need to fill out US tax forms, would be exposed to US regulatory risk, estate tax issues, etc. Vanguard Australia's other funds (VGS, VGE, VAS, etc) are all domiciled in Australia.

But yes, it does seem odd they they offer this in Australia but not in the UK. Perhaps UK regulations don't allow foreign-domiciled "wrapper" funds like this to be listed?

andrew99999
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Re: UK bias in VG LifeStrategy and Retirement funds (UK)

Post by andrew99999 » Tue Jul 23, 2019 8:46 pm

steveyg50 wrote:
Tue Jul 23, 2019 6:58 pm
I just had a quick look at VG Australia - you have a world (EX US) ETF fund - Vanguard All-World ex-U.S. Shares Index ETF (VEU)

We have not got a world Ex US in UK. It is odd how VG round the world has different ideas.
They are leftover from when Vanguard and iShares first opened and they simpliy cross-listed their US funds on the Austrian stock exchange which included US and separate non-US funds.

Since then Vanguard has created full replication indexes instead of simply cross-listing and they are ex-Australia
VGS = developed LC/MC ex-Australia
VGAD = developed LC/MC hedged to AUD ex-Australia
VISM = developed SC ex-Australia
VESG = ethically conscious global ex-Austral

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whodidntante
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Re: UK bias in VG LifeStrategy and Retirement funds (UK)

Post by whodidntante » Tue Jul 23, 2019 9:34 pm

According to JPMorgan, even the colonies need to be concerned about their currency.

https://privatebank.jpmorgan.com/gl/en/ ... -to-an-end

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