Who is the fund for?
With a product like LifeStrategy 80pc Equity, you don’t need to edit and move positions. It is designed to be a basic long-term asset to support you in different market conditions. Typically, investors use it as a base holding or to complement other funds in their portfolio.
How does the investment strategy work?
The fund has a ‘strategic asset allocation‘, which means that the mix of 80% equities and 20% bonds remains the same: we don’t change it tactically. Historically, we know that this combination has worked well in different market conditions.
We invest in Vanguard index funds because costs are important to us. We want to make sure we invest in things we understand and can keep overall costs low, so we can pass on more returns to investors.
Finally, the fund has a ‘home bias’ for the UK of 25% on the equity side and 35% on the bond side.
What would you say to anyone nervous about investing in the fund at such an uncertain time?
Most people use our funds for long-term goals, so there will inevitably be periods of market volatility. We think the key is to keep costs low, so they don’t eat away at your returns.
Also, we don’t try to time the markets. It’s a myth that active managers can time the markets. Research shows that being out of the market for just a few days can have a dramatic effect on your long-term returns. The key is to stay invested and avoid the siren calls about people who can time the market. Maybe they can do it once or twice, but can they do it year after year?
Our fund offers fantastic diversification, with 23,000 underlying investments across 50 different markets. These economies and markets move in different cycles, so this diversification can be your friend. Finally, during every period of volatility over the past decade, our bond allocation has provided a much-needed buffer.
Is the fund exposed to Russia?
At the end of February, we had an extremely low exposure to Russian stocks and bonds of 0.1 pc of the fund. We continue to assess the evolution of global sanctions and the potential impact on our funds.
How will you protect your bond allocation against rising inflation?
When central banks say they will raise interest rates in response to higher inflation, it drives bond prices down because, over time, inflation erodes the fixed income securities they pay for. This affects the “price return”, but investors often forget to look at the “total return” offered by the bond, because you have an income stream from the interest the bond pays. Sometimes the price return can be negative, but the total return can be positive if the bond earns enough interest.
Bonds are what you need in a portfolio in times of uncertainty because they provide a buffer. This is true even when inflation is high. As well as holding government bonds and investment grade bonds, the fund invests in UK inflation-linked bonds, which provide additional protection when inflation is higher.
What have been your best and worst investments?
Over the past decade, the US stock market has been our best investment. it has experienced extraordinary growth. Spain was the worst performing stock market.