The Lemon Fool

Vanguard state here:

https://www.vanguard.co.uk/documents/adv/literature/trf-adviser-guide.pdf

Knowing investors often prefer their domestic market and are unwilling to take on too much currency risk with overseas investing, the funds will always have exposure to all segments of the broad UK stock market, including large-, mid- and small-cap equities.

At the beginning the Target Retirement Funds invest 80% equities, including 20% UK equities and 60% Global ex-UK.

So their UK equity weighting is 25%.

That seems like a large home bias. Is there any benefit to this? I have seen it mentioned on these forums that there may be a tax benefit associated with a certain degree of home bias. What might this be in the context of a SIPP? Could it make up for loss of diversification?

Given the overall fee of 0.24% for a Target Retirement Fund, how would investing in a Target Retirement Fund, e.g. Target Retirement 2055, compare with say:

- 80% in Vanguard FTSE ALL Cap [0.23%]
- 10% in Vanguard U.K. Gilt UCITS ETF (VGOV) [0.07%]
- 10% in Vanguard Global Aggregate Bond UCITS ETF (VAGP) [0.1%]

Would the above allocation not be a) cheaper and b) superior in terms of greater diversification?

And what about over the long term? Could I simply reduce the bond allocation and retain a 50/50 split between VGOV and VAGP?

I am open to suggestions regarding split between VGOV and VAGP is 50/50 is sub-optimal.

I see that that the Vanguard Retirement Fund introduces inflation-linked bonds at a late stage. Presumably I could do that too.

What I am trying to work out is whether there is a tangible benefit in setting up my own allocation compared with just opting for the appropriate Vanguard Target Retirement Fund.

Thoughts on this much appreciated.

Some sound observations there about shortcomings of an all-in-one fund.
But be careful of the risk expressed in the advice: a simple portfolio can help a sensible person avoid doing stupid things.
How much extra do you estimate your 'improved' portfolio might return, and how sure are you that it would? Is it worth the risk?

I've been told that the target retirement funds essentially move between different Vanguard Lifestrategy funds as they vary their Equity/Bond ratio.

Personally I'd rather control that kind of movement myself rather than buying a target retirement fund to do it for me - I might want to change the ratio at a different time or at a different rate, or in a different manner (say buy some LS20 exclusively for a few months rather than sell LS 100 and buy LS60 for example) than the target retirement fund.

If I don't intend to buy an annuity at the end, then the "shape" of any migration to bonds as retirement approached would be entirely different, and possibly less dramatic.

I'd suggest if you're discussing asset allocation as you do in your first post, you're not the target market for them - you're likely to want more fineness of control, although I don't know if that is a good thing.

Thanks xeny. Actually I think I really want to implement Lars Kroijer's recommended strategy which he details in his Investing Demystified book. Having re-read the section on additional government and corporate bonds I am not sure that his recommendations are fully understood.

I am still working things out and here is a record of my present understanding.

Lars recommends:

A) Minimal Risk Asset [UK government bond with maturity matching investor's time horizon]
B) Risky Assets including
B1) World Equity [world equity index or as broad exposure as possible]
B2) Government bonds [diversified, real return-generating government bonds of varying maturities, countries and currencies]
B3) Corporate bonds [broad range of corporate bonds of varying maturities, risk, currency, issuer and geographic area]

The returns of these are estimated at:

A) 0.5%;
B1) 5%
B2) 2%
B3) 3%

The ratio of B) is to be as follows B) = 0.75*B1 +0.1*B2 + 0.15*B3.

B1) is easy. VWRL or Vanguard FTSE ALL Cap Accumulation.

A), B2) and B3) are significantly harder.

At the moment I think A) might be Vanguard U.K. Gilt UCITS ETF (VGOV) [0.07%].

B2) Lars goes into much detail about the additional government bonds. They are not supposed to be AAA in other countries, e.g. US or JP. They are supposed to carry risk and offer greater return than A) in exchange for that risk. They are supposed to be sub-AA government bonds.

Lars suggests for B2)

B2-1) emerging markets government bond
B2-2) developed world sub-AA government bonds, e.g. sub-AA eurozone government bonds

Any thoughts on what ETF products I might look at?

I think actually:

1) Vanguard FTSE ALL Cap Accumulation
2) Vanguard U.K. Gilt UCITS ETF (VGOV); and
3) Vanguard Global Aggregate Bond UCITS ETF (VAGP)

.. may approximate the above, if I am reading the underlying holdings correctly.

Update:

the risk weightings I am interested in are:

C: 0.33*A + 0.5*B1 + 0.07*B2 + 0.1*B3 (this is only 50% equities though)

or

D: 0*A + 0.75*B1 + 0.1*B2 + 0.15*B3 (this is 75% equities).

But it is difficult to work out weightings amongst say:

Vanguard U.K. Gilt UCITS ETF (VGOV)
Vanguard FTSE ALL Cap Accumulation
Vanguard Global Aggregate Bond UCITS ETF (VAGP)
Vanguard Global Corporate Bond Index Fund - Hedged Investor Accumulation

To keep things simple, I am thinking of something like:

0.8 * Vanguard FTSE ALL Cap Accumulation
0.1 * Vanguard Global Aggregate Bond UCITS ETF (VAGP)
0.1 * Vanguard Global Corporate Bond Index Fund - Hedged Investor Accumulation

Any thoughts?

Any thoughts?

We'll only know how perfect it was compared to an all-in-one fund, I think that was your objective, at your 'final reckoning'!
At this stage we can't know the perfect mix of assets, only that many are perfectly fine. This could well be one of them, but you need to be able to stick with it in the 'bad' times. It would seem unwise to bail out of it if it under performs a different mix over several years, as you'd lock in the losses with no certainty your new choice would do better ahead. So, can you stick with it? Of course, if it performs well you can bail out if you think it has flaws you didn't see before, to correct them - beware any tax consequences.
An equity heavy mix will have more volatility than a government bond heavy mix; you've got equities and corporate bonds, so be ready for volatility, but that's a shallow risk. Bernstein's deep risks which attack your purchasing power are inflation, market collapse (China 1949, Cuba), deflation, confiscation (by governments) and war. Diversification by asset types and country can help against those, maybe aided by overseas real estate (not very practical).
Are you taking unnecessary 'provider' risk having everything with Vanguard? Rhetorical question.

JohnW wrote:

Any thoughts?

We'll only know how perfect it was compared to an all-in-one fund, I think that was your objective, at your 'final reckoning'!

Hi JohnW,

Off-topic for this thread, but I hope this helps -

https://www.lemonfool.co.uk/viewtopic.php?f=21&t=22151

Cheers,

Itsallaguess