User:DJN/ EU: Industry approach to portfolio construction

How does the DIY retail investor in the EU gain reassurance that the simple Boglehead portfolio suggestions are appropriate and allow the investor to apply the Boglehead approach taking into consideration the number of countries in the EU and their differences?

In order to underpin logic behind the current EU Boglehead suggestions for portfolios it might be useful to review the material that is publicly available from Vanguard, Blackrock and others within the industry. Vanguard and Blackrock are major players across the globe in investment products, but they are not the only major providers in the EU, however they have a large range of products and are focused on lowering costs and providing transparent access for retail customers.

In addition the very large pension industry in Europe has a much longer track record than the US asset managers in investing from Europe and will have tried and tested portfolio solutions. Reference to the publicly available information in regards to pension fund portfolio construction may be useful and some information is included.

Scope of review
The purpose of the paper is to investigate at a high level what material is available that can provide pointers as to the effectiveness of the Bogleheads suggested portfolios for EU investors and what if any adjustments or additions should be reviewed and potentially include on Wiki.

The likelihood of finding a serious and well documented academic paper is limited and is in any case outside the scope of this paper. Should any papers come to a Bogleheads attention or become available then these papers will be reviewed in due course and referenced if relevant.

It is assumed that the major players such as Vanguard, Blackrock, State Street and the local European asset managers have built up a deep knowledge base founded on professional research for the construction of their portfolios including the EU.

Vanguard and Blackrock are major players across the globe in investment products, but they are not the only major providers in the EU, however they have a large range of products and are focused on lowering costs and providing transparent access for retail customers.

The information provided here relating to Vanguard and Blackrock and others has been sourced entirely from the public domain, the subsequent interpretation of any of that information is subjective.

In addition the very large pension industry in Europe has a much longer track record than the US asset managers in investing from Europe and will have tried and tested portfolio solutions. Reference to the publicly available information in regards to pension fund portfolio construction may be useful and some information is included.

Vanguard
Vanguard provide no investment advice services in the EU. The extent of any material related to portfolio construction in the EU and available from Vanguard is limited and no regular papers are apparently available.

There are numerous products available from Vanguard for EU and non-US investors. A comprehensive range of UCITS ETFS and mutual funds are listed and available. What is the basis for building a portfolio from these products? Vanguard explicitly do not provide advice or guidance on investment matters in the EU and a formal presentation of their portfolio construction is not available. In the UK Vanguard provides solutions for retail investors that seek to provide the investor a single solution for their life savings with options for risk appetite and age, by reviewing these products we can gain insight into the makeup of the Vanguard portfolios for the longer term saver. Two product ranges are reviewed briefly here:

Target funds
On the UK Vanguard website for individual investors Vanguard propose (without giving any explicit investment advice) 10 options for Target Funds. They state that in respect to the target funds shown:

“……..there's a logic to the funds' names that can help you make a start. Each fund has a year in its name – this is the date at which you're planning to retire. If you choose the fund that most closely matches the year when you want to retire, you'll be investing alongside others with similar goals – allowing you to benefit from the scale and efficiency of pooled investment and the low charges that come with it.”

Life strategy funds
In addition on the Vanguard website there is an offering for a product called: Life Strategy Funds and the stated aims of these funds are:

“……..LifeStrategy range – five ready-made portfolios, each with different levels of potential risk and return that make investing simple. And all made with decades of expertise and experience of managing investments, for over 20 million people worldwide.”

The life strategy funds are provided in five versions which address different durations and risk levels:


 * Shorter-term goals (3–5 years)


 * Medium to longer-term goals (5+ years)


 * Longer-term goals (10+ years)

As this website is aimed at UK retail investors the assumptions in respect to home country bias would need to be reinterpreted for another EU jurisdiction. There is no other place where access to the Vanguard approach on an aggregate basis can be studied. However, the strategy should be applicable with the exception of the choice of some of the funds and the percentage applicable to the different jurisdictions and perhaps some of the individual products due to availability.

The individual target funds provide a collection or portfolio of funds that Vanguard consider suitable for the investor with a particular target retirement date. The risk levels of each target date and thus the allocation and asset selection it is assumed are therefore aimed at the duration until retirement of the investor. We can therefore assume that the research capabilities of Vanguard have been applied to the selection and makeup of the underlying portfolio.

The underlying portfolio consists in each case of a mix of:
 * ETFs


 * Mutual funds


 * Unit trusts

Key issues
These vehicles cover both bonds and stocks. Percentage sub-allocations are given to one decimal point adding up to a 100% total. The range of funds include both accumulating and distributing versions.

Some of the bond funds are hedged (in this case to sterling the home currency of the investors).

As these target date funds are Vanguard products the individual choice of funds may not be available in specific ETF format. In addition, alternatives may or may not be available from other asset managers.

The funds used within the target date and the life strategy portfolios are with a few exceptions Vanguard mutual funds. For the purposes of an ordinary DIY investor alternative ETFs will need to be identified.

Breakdown of sub-assets
Reviewing the lowest and the highest risk versions of each type of Vanguard product range and ignoring the basic asset allocation, the following broad individual fund types are common to both ranges:

BONDS


 * Global aggregate bond sterling hedged accumulating


 * UK government bond accumulating


 * UK Gilt inflation linked


 * UK investment grade bonds accumulating


 * Developed world government bonds sterling hedged (individual bond funds for: US; Euro govts; Japan

EQUITIES 
 * Developed world (ex UK)


 * UK stock market


 * US equities


 * EU ex UK


 * Emerging markets


 * Pacific ex Japan


 * Japan

The granularity of the share funds proposed by Vanguard for the riskier versions is greater, and includes a greater number of funds with up to 9 funds in total. The funds include developed world ex UK; US equities; emerging markets; developed Europe ex UK; UK; pacific and pacific ex Japan.

The lower risk versions have a much reduced range of 4 to 5 funds with developed world ex UK; UK; US equities and emerging market funds only.

Summary
The themes for all of the Vanguard life strategy and target date funds are clear and consistent:

Sub asset allocation

While the investor will address their risk appetite primarily through the basic allocation between fixed income and stocks, the sub asset allocation to suit the range of feasible time frames and risk appetites may differ due to the particular location of the investor and require interpretation to suit their location and fund choice.

BONDS


 * Bonds to cover global aggregate and hedged to local currency
 * Bonds to cover developed world government and hedged to local currency


 * In country bonds in local currency


 * In country government high grade bonds


 * In country corporate investment grade bonds


 * Inflation linked bonds

STOCKS


 * Stock fund reflecting developed world


 * Stock fund for local market


 * US market only fund


 * Emerging market fund


 * EU ex local market
 * Pacific ex Japan


 * Japan

The use of a stock fund for the local market will likely depend upon the particular country, it would be an insignificant tilt to incorporate for many European countries; for example Luxembourg or Portugal wouldn't merit a separate focus due to their small size and the internal concentration in a small number of companies. However it could be useful for Germany, the UK or France for example.

Blackrock
Blackrock carry out ongoing research and surveys and this information is made available to the public on an irregular basis. In a recent report (2018): Asset allocation Blackrock review the results of a comprehensive survey of their EMEA clients across the region. This and other Blackrock material provides some useful insights as to their portfolio construction approach.

There are numerous products available from Blackrock for EU and non-US investors. A comprehensive range of UCITS ETFS and mutual funds are listed and available. Blackrock explicitly states that they do not provide advice on portfolio construction. However in addition to the individual products that Blackrock offer on the global Blackrock website for individual investors they propose (without giving any explicit investment advice) 11 options for multi asset retirement date funds.

LifePath multi asset funds
They state that in respect to the retirement date funds shown:

"The Fund aims to achieve a return on your investment through a combination of capital growth and income returns for investors planning to retire between 20xx and 20yy, by investing primarily in other funds, with an asset allocation that changes over time. The Fund intends to gain indirect exposure globally to equity securities (e.g. shares), fixed income (FI) securities (such as bonds), money-market instruments (MMIs) (i.e. debt securities with short term maturities), alternative assets (such as property and commodities), deposits, cash and cash equivalents, by investing primarily in other funds (which are expected to be predominantly index tracker funds and may include funds managed by the investment manager (IM), or another company within the BlackRock Group. The Fund may also invest directly in equity securities, FI securities, MMIs, deposits and cash."

The LifePath funds are provided in 11 versions which address different durations and risk levels:

The retirement dates available range from 2021 to 2054.

As this website is aimed at UK retail investors the assumptions in respect to home country bias would need to be reinterpreted for another EU jurisdiction. The strategy should be applicable with the exception of the choice of some of the funds and the percentage applicable to the different jurisdictions and perhaps some of the individual products due to availability.

The individual target funds provide a collection or portfolio of funds that Blackrock consider suitable for the investor with a particular target retirement date. The risk levels of each target date and thus the allocation and asset selection it is assumed are therefore aimed at the duration until retirement of the investor. We can therefore assume that the research capabilities of Blackrock have been applied to the selection and makeup of the underlying portfolio.

Pension funds
Pension Systems in the EU – Contingent Liabilities and Assets in the Public and Private Sector Based on a study conducted for