Thank God for Jack Bogle. The founder of Vanguard and evangelist for all things passive, low-cost and mutual (Vanguard is a mutually owned organisation) was instrumental in disrupting the investment industry. Without his radical ideas we’d all still be over paying for rubbish, underperforming products.
Arguably his single most important ideas were aimed at ordinary investors. I’d sum it up as humble arithmetic and humble thinking about strategies. The numbers bit related to his relentless focus on cutting costs – investment is full of uncertainties but there is one certainty in markets, that excessive costs will destroy returns.
The humble strategies bit was to ignore the noise of markets, not to over trade and not to get too carried with clever sounding strategies. Go with the flow, track the markets at the core of your portfolio and concentrate on developing your personal capital.
In many ways I’d argue that Bogle was the intellectual father of the move towards lazy portfolios, full of passive, low-cost funds which track the ebb and flow of the markets. The idea here is to keep a core that mirrors the market at low cost, whilst also having a bunch of satellite portfolios where you can indulge big themes or your own ideas.
This is all sound advice and certainly influences my own thinking. In a couple of weeks, I’ll look at my own take on a lazy(ish) portfolio full of passive funds. But for now I want to highlight a gaggle of funds which I think live up to Bogle’s big idea: humble arithmetic and strategies using risk-rated multi-fund passive portfolios.
Low-cost, multi-asset passive options
If you’ve been following the 'robo advice' revolution, you’ll have heard that there’s a bunch of disruptive tech types out there trying to offer low-cost, online portfolios full of exchange-traded funds (Bogle really didn’t like ETFs by the way – too tactical for him).
It’s all high-profile stuff, with lots of clever advertising. But arguably even bigger sums are being invested in classic mutual funds animated by the same idea – multi-asset passive portfolios managed on big wrap or direct-to-consumer platforms.
One of the biggest beasts in this fast evolving market is... surprise, surprise, Vanguard. Its LifeStrategy funds are hugely successful but given the blizzard of publicity surrounding all things Bogle and Vanguard related I’ll look again at these funds much later this year.
Instead I want to highlight a relatively new player in this space, AJ Bell. As we’ll see there are some big asset managers kicking around this space - I will look at some of these players over time as well – but AJ Bell is a bit different.
It's a platform first and foremost for ISAs, Sipps and other structures with a competitive 0.25% platform fee. That’s still more than the 0.15% Vanguard charges for its ISA, but the passive fund provider only allows you to access its own products. AJ Bell’s platform is a proper rival to Hargreaves Lansdown and is making a determined effort to build a once-size-fits-all portfolio funds service.
How did they stack up last year?
Crucially we’ve now got data in for 2018 which allows us to look at performance for the range of passive multi-fund offerings. Nearly all the players in this market offer a spectrum of risk graded portfolios ranging from 1 to 10, or cautious to adventurous, or variations on the theme.
I, along with the regulators at the Financial Conduct Authority, have my doubts about this simplified risk structure, but that’s for another day. What this does allow for is comparison of returns and costs. I have identified the most cautious and most adventurous portfolio in each case, including AJ Bell's – the detail is in the boxes below. I have also included costs, in some cases which include a range depending on which platform you are on.
|Cautious||1 Year Return (%)||Costs|
|7IM AAP Cautious||-2.23||0.68% to 0.82%|
|BlackRock Consensus 35||-1.67||0.62% to 0.64%|
|Legal & General Multi-Index 3||-1.92||0.24% to 0.31%|
|Standard Life Inv Myfolio Market I||-2.17||0.33%|
|HC Verbatim Multi-Index Portfolio 3||-3.23||0.40% to 0.71%|
|Vanguard LifeStrategy 20% Equity||-1.14||0.22%|
|VT AJ Bell Passive Cautious||-2.25||0.44% to 0.50%|
|Adventurous||1 Year Return (%)|
|7IM AAP Adventurous||-8.05|
|BlackRock Consensus 100||-5.45|
|Legal & General Multi-Index 7||-6.07|
|Standard Life Inv MyFolio Market V||-6.35|
|Vanguard LifeStrategy 100% Equity||-5.04|
|VT AJ Bell Passive Adventurous||-5.12|
|HC Verbatim Multi-Index Portfolio 3||-6.55|
|'Robo' Adviser||Cautious Return||Growth Return||Cost|
|Nutmeg||-0.5% Nutmeg 1||-9.8% Nutmeg 10||0.75% up to £100,000 plus c.0.19% for funds and 0.08% for bid-offer spread|
|Scalable Capital||-1% to -3.8%||-6.7%||0.75% plus c.0.24% for funds|
What’s immediately obvious is that most of these providers have offerings that are much cheaper than the big robo offerings. These digital wealth platforms will say that they offer fantastic internet platforms (which they do) and bespoke portfolios (more questionable in some cases) but the general end result doesn’t look that different from the mutual funds highlighted here. By and large you should be able to get a managed portfolio of funds and ETFs for around 0.5% plus a platform fee, which should total much less than 1% per annum.
What about performance? Last year was tough for everyone and these numbers show that there really wasn’t much variation between returns for cautious portfolios. By and large the cautiously managed funds all lost between 1% and 3% with AJ Bell's funds in the middle. As for adventurous portfolios there was more ‘dispersion’ in returns, with losses ranging from 5% to 8%. AJ Bell's portfolio lost 5.1% just, slightly more than the 5% incurred by Vanguard’s most adventurous LifeStrategy fund.
Obviously, all these fund managers have subtly different approaches. Vanguard’s approach is very patient, strategic, and uses in-house funds – all very Bogle inspired.
Legal and General Investment Management by contrast offers much more tactical asset allocation and a wider range of underlying asset classes, including access to its own UK property funds.
The role of tactical switches
AJ Bell’s approach is also more tactical, with a real emphasis on analysing risk. The fund managers are always looking for different ETFs and passive funds with low correlation to each other. According to the firm’s chief investment officer, Kevin Doran, 'what we do is run our correlation tests not just on a geographical basis, but also on a sector and cap-weighted basis to see if there are ways of creating more efficient portfolios'.
The other big idea is that the firm thinks that markets aren’t normally distributed, which means that the firm sits down and reviews strategic asset allocation annually, and then sits down again on a monthly basis to assess the markets and understand if they want to undertake any tactical views.
But this doesn’t mean that the fund managers are always trading, a real bugbear for the likes of Bogle. Matt Brenna, responsible for the day-to-day running of AJ Bell's passive funds, said the group had taken only one tactical position over the last 12 months, albeit a 'substantial' one: moving all gilt positioning into short duration.
'We fundamentally believe that gilts are overpriced, and over our investment time horizon (five years plus) will normalise to higher yields, so feel it is warranted to protect portfolios. This is most substantial in our lower risk cautious portfolio, which has a 27% weighting to gilts,' he said.
So much for 2018. What about the positioning the portfolios for 2019? The team is positive about healthcare and consumer staples but worried about liquidity risk within the property space.
Other big calls include a favouring for emerging market debt as a long-term strategic asset class. 'This is a fairly expensive asset class to invest in passively (costing 0.25% per annum), however it is lowly correlated with other fixed income asset classes, as emerging markets are on different economic cycles. We do not see this asset class being used by our passive peers,' said Brenna.
I think Bogle would have loved the increasingly competitive landscape in providing passive multi fund portfolios. Vanguard do have a great product, but it isn’t for everyone. Established outfits in the passive funds space such as Seven Investment Management and Legal and General (both first rate) are now being given a good run for their money by an upstart platform provider.
Crucially I think all these products (AJ Bell's included) provide stiff competition to the digital robo platforms, which all have to up their game and prove that they can provide cost-effective returns and not just clever apps.
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