Building a non-US Boglehead portfolio

Creating an EU version of the Boglehead 3 fund portfolio
The purpose of this paper is to provide some background to the current Wiki portfolio (July 2019) suggestions for EU investors and to tie that back to the original Boglehead philosophy. In addition some justification for the investor of the choice of current Wiki suggested portfolios for EU investors is put forward and seeks to form a bridge between the Boglehead philosophy as presented in Bogleheads' Guide to Investing and what is applicable to the EU retail investor.

It may also provide some support to an investors desire to adjust their portfolio by the inclusion of funds other than those suggested in the Wiki portfolios for whatever reason.

The Wiki for EU investors includes some suggested portfolios that are considered appropriate for the Boglehead approach in investing. In addition various suggested portfolios are presented under some of the individual country Wiki pages. For example the UK_investing page has various suggested portfolios and links to Vanguard target funds. The information in this paper may be of benefit to other non-US retail investors.

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

The investor should carefullly research all potential investments and seek professional investment advice prior to making any investments.

Boglehead portfolio
Strictly speaking the original and still entirely relevant 2 or 3 fund Boglehead portfolio is a US centric construction and many US bogleheads stick fairly carefully to the original formula notwithstanding the long debate about the introduction of international elements to the equities side of the equation.

The 2 fund version uses entirely US assets and the later 3 fund version includes some international equities. In addition Vanguard and Blackrock now include international bonds in their bond fund offerings to those who wish to diversify further. Why change something which has worked in the past and is elegantly simple to construct and maintain?

Basic parameters of a Boglehead portfolio
The basic parameters for the creation of a simple Boglehead portfolio are to found here: [|Bogleheads®_investment_philosophy] where the following key steps are set out:
 * Develop a workable plan


 * Invest early and often


 * Never bear too much or too little risk


 * Diversify


 * Never try to time the market


 * Use index funds when possible


 * Keep costs low


 * Minimize taxes


 * Invest with simplicity


 * Stay the course

The original Boglehead portfolio is now based upon the following ETFs:


 * Vanguard Total Stock ETF (VTI)


 * Vanguard Total International Stock ETF (VXUS)
 * Vanguard Total Bond Market ETF (BND)

Non-US aspects of approach
The general advice contained in the Wiki for the creation of a simple Bogleheads portfolio is entirely relevant to non-US investors and the EU investor should follow this guidance carefully, get comfortable with their risk appetite and prepare an investment plan based upon these principles and stick to it.

An excellent guide to the process of building a portfolio is provided by Vanguard and can be accessed here: Vanguard Portfolio Construction Guide.

However certain aspects of the build up of the Bogleheads portfolio cannot be so easily applied and adopted such as the choice of funds based upon geography and currency for example.

Blackrock in a recent survey Portfolio insights Q1 2019 Blackrock of their major clients in Europe (EMEA 600 clients) concluded that the two main risks to their clients’ portfolios are:


 * Equity risk

Equity risk affects all investors in stocks.
 * Currency exchange risk

For non-US investors the Wiki suggested portfolios propose global aggregate equity ETFs and global aggregate and/or global government bond ETFs as the basis for building a BH style portfolio. These suggestions as noted above are not strictly in conformance with the original BH portfolio particularly as expressed in the 2 or 3 fund portfolios.

Currency risk
Concentration and the currency issue immediately impact the choice of bonds and equity funds for the non-US investor should they choose US assets only. Therefore a more diversified range of assets are included in the non-US portfolios. Any evidence for the comparison of this equity approach and the original BH portfolio is difficult to access for the retail investor.

The bond elements which form the basis for the ballast side of the portfolio are generally hedged back to the investors local currency to remove additional currency volatility where a global aggregate or global government fund is used. The hedging while reducing volatility will also reduce the returns of the bond fund.

The advice to include or base your fixed income side of your portfolio on bonds in your country would lead some retail investors to include local bonds either government or aggregate in their portfolios. This approach introduces bias, has lower diversity and may lead to lower returns in the long run.

Geographical spread
The geographical spread of the global funds is entirely different to the original 2 and 3 fund approach.

Over reliance on US equities such as is represented in the total stock market fund of the original BH 2 or 3-fund would expose the non-US investor to additional risks.

Diverse and multiple countries
The EU consists of 27 different countries with different legal and regulatory systems. In addition the savings and investment industries are not aligned and the taxation, level of costs and the quality of services can be quite different.

Pension systems across the EU are different and the take up of the existing pension schemes varies.

Weak support for understanding the EU investors portfolio strategy
So what you might ask, but without empirical evidence to demonstrate the quality of the returns it is not a given that the non-US versions are equal to or superior to the original versions. How do the non-US investors’ portfolios perform in comparison to the US Boglehead approach?

Sources of information in regards to the basis for the construction of portfolios following the boglehead philosophy are not readily available or accessible for the non-US investor with the exception of Canada and perhaps to a lesser extent Australia where Vanguard sells direct product.

Major players portfolio construction approach
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. 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.

In order to justify the current EU Boglehead suggestions for portfolios it might be useful to review the material that is publicly available from Vanguard and Blackrock.

Vanguard
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. In addition 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.

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 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
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.

LifePath multi asset funds
On the UK Blackrock website for individual investors Blackrock propose (without giving any explicit investment advice) 11 options for multi asset retirement date 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.


 * 2019 - 2021
 * 2025 - 2027
 * 2031 - 2033
 * 2037 - 2039
 * 2040 - 2042
 * 2043 - 2045
 * 2046 - 2048
 * 2049 - 2051
 * 2052 - 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.