As well as last week’s DIY investment launch, Vanguard is looking to gain more traction in the workplace pension market with retirement-date funds it hopes advisers will use too. Peter Westaway is chief economist and head of the investment strategy group Europe for Vanguard.
Please explain how your retirement funds work.
Vanguard has recently launched some Target Retirement Funds. The idea is that, when somebody invests in a portfolio, rather than having to continually think about ‘what’s the appropriate asset allocation for me, for this stage of my life’, that asset allocation will gradually change through somebody’s life. We call it the glide path.
Maybe early on in life, people will hold more equities, have a slightly more risky portfolio. Then gradually, as they get closer to retirement, and even through retirement, they will have a much less risky portfolio. They will derisk and have more fixed income. What’s so simple about Target Retirement Funds is all that happens in a single fund.
And at low cost as well, because you’re a passive [manager].
Well partly because we are a passive [manager] and all the underlying asset allocations are done passively, both on the equity side and on the fixed income side. And partly because, at Vanguard, we are particularly passionate about low cost. We have an ownership structure that means we drive our costs down as low as we possibly can to benefit the client.
To what extent are advisers using these funds?
The Target Retirement Funds are relatively new in the marketplace. At the moment our LifeStrategy funds are really popular with financial advisers. These involve advisers recommending people buy different types of assets; maybe 100% equities or 80% equities/20% bonds, all the way through to 80% bonds/20% equities. Those different types of asset allocation are appropriate for people who maybe want more risk or have long-time horizons, so they can let the higher returns of equities come through.
I think advisers will gradually realise the benefits of this so-called one-stop shop of Target Retirement Funds. It will make life easier for advisers and for the end clients.
So you have the target [retirement] dates. Like 2055 or 2030. And the funds are geared towards those dates.
Yes, they are called Target Retirement Funds because the glide path for asset allocation is pinned on to the retirement date of the individual buying the fund. So, typically, somebody retiring in 2050, for example, might now want to hold something like 80% of their portfolio in equities. But, by the time they retire, they might want to bring that proportion right down to, say, 40%. And after they have retired they might want to derisk it more, to say 30%. So it is all about making that dynamic asset allocation decision.
What is the relationship between the LifeStrategy funds and these Target Retirement Funds?
The relationship really is that, at a single point in time, holding a Target Retirement Fund or holding a LifeStrategy fund looks pretty much the same, because you have a static asset allocation, say 80% equities/20% bonds. The big difference is that, with Target Retirement Funds, that asset allocation gradually changes through your life.
Are these funds currently used by workplace pension schemes?
That’s very much what we want to happen and, indeed, in the US that’s a huge market for the Vanguard Target Retirement Funds. At the moment we are finalising the way they are offered in workplace pensions.
There are some esoteric details to do with how workplace pensions are taxed to make it more advantageous for people to hold them in these workplace pensions. But I think this is going to be a huge market.
You have the two main asset classes, of equities and bonds, but you don’t have any property or commodities. Why is that?
There are two main reasons. The first is we do not find the evidence completely compelling, whether it is the return characteristics or the correlation characteristics, that adding commodities or real estate or property really makes that much difference. We think our simple equity/bond allocation pretty much does the job.
The second reason is the simplicity. It is easy to overcomplicate the investment process and the evidence shows a very simple bond/equity split can deliver a really good retirement outcome for all investors.