Do multi-asset strategies provide good value?

Commentary by Andreas Zingg, head of multi-asset solutions, Vanguard, Europe

Costs are a key driver of investment returns and keeping costs low is one of Vanguard’s four principles for investment success.

While single-asset bond and equity funds have seen significant reductions in costs in recent years, there’s been less pressure on multi-asset funds to follow suit. Since 2017, the average costs of bond and equity funds have fallen 12% and 9%, respectively; while those for multi-asset funds have declined only 6%¹.

Average expense ratio by asset class

Source: European Securities & Markets Authority (ESMA).

Notes: Calculations based on the percentage change in total ongoing costs for main retail investors’ asset classes for EU27 UCITS, between 2017 and 2021.  

What are ongoing costs?

All funds charge ongoing charges figures (OCF) to cover the costs of managing and running the fund. These charges, expressed as a percentage of fund assets—or its expense ratio—are deducted from the fund’s assets and reflected in its net performance returns.

According to the latest industry data, the average expense ratio for multi-asset funds in Europe is approximately 1.45% (compared to 1.40% for equity funds and 0.91% for bond funds)². At first this may not seem surprising, but when we consider the average annualised return for a multi-asset fund was 4.5%³, then we see how costs accounted for about 25% of the average fund’s gross return—illustrating how high costs can significantly impact long-term performance and investor outcomes.

Why are multi-asset funds more expensive?         

The range of multi-asset expense ratios varies widely, with the lowest-costing multi-asset funds charging 40 basis points (bps) or less and the most expensive charging more than 2%⁴.

Many multi-asset funds charge more than single-asset strategies because they have additional ongoing costs related to portfolio construction and asset allocation. But when we look a little closer, the story isn’t quite as straightforward.

Funds that use higher-cost active funds to build their portfolios will pass along these fees to their investors, compared to funds that use low-cost index funds as building blocks. Additionally, multi-asset funds that take a tactical approach to asset allocation often have higher costs than those using a strategic approach. 

While such variety in the styles and strategies of multi-asset funds can offer many positives for investors, it presents a real hurdle when it comes to benchmarking performance. Unlike single-asset strategies, there are few established multi-asset indices, making it more difficult for advisers and investors to evaluate how their funds stack up relative to the broader market.

Importantly, the lack of recognised indices means there are also fewer low-cost multi-asset funds designed to track their performance – further adding to the challenge of assessing if a multi-asset fund is providing good value in the same way as with an equity or bond fund. For example, an investor in a UK equity fund can evaluate the fund’s performance relative to its benchmark index (for example, the FTSE 100) and refer to a variety of low-cost FTSE 100 ETFs and index funds as benchmarks for costs. The same comparative benchmarks are not as accessible to multi-asset investors.

The trend towards lower costs

In the UK, the appetite for low-cost multi-asset funds (funds with expense ratios of 40 bps or less) is gaining momentum, accounting for more than half of all multi-asset fund inflows over the last five years and 26% of the total multi-asset market in the UK⁵.

Not all multi-asset funds with higher costs will underperform their peers. Yet our research shows that lower-cost funds have a higher probability of outperforming costlier ones, especially over longer periods of time.  More often than not, high costs eat away at a fund’s returns, leaving investors worse off than if they had chosen a simpler, lower-costing strategy focused on giving back more to its investors⁶.

Assessing the impact of costs on multi-asset fund performance

Peer group performance data, like those provided by the research firm Morningstar, can help advisers assess whether their multi-asset funds are providing good value to investors.

By comparing a multi-asset fund against other funds in the same risk category⁷, we can evaluate how the fund’s performance (after costs) measures up against its peer group average over different time periods. If a multi-asset fund outperforms its peer group over the long term after costs, it’s a strong indicator that the fund is a good choice (or not a bad choice) for investors.

For example, the table below compares the annualised returns of the Vanguard LifeStrategy 60% Equity fund with similar funds in the Morningstar GBP Allocation 40-60% category over different timeframes:  

Source: Vanguard/Morningstar as at 31 March 2023. Past performance is not a reliable indicator of future results.

Peer group is defined as the Morningstar category, including UK, Luxembourg and Irish domiciled MFs and ETFs (all share classes). All returns shown are in GBP and net of fees.

Please see the '5 year rolling return performance' table below for additional information.

When we compare the performance of the LifeStrategy fund against its peer group, we see the case for low-cost multi-asset investing take shape. The LifeStrategy 60% Equity fund outperformed its category average over 1-, 3-, 5- and 10-year periods, with the margin of outperformance growing wider as the timeframe grew longer. 

Value to investors

Providing value to investors is not just about costs; it’s also about performance, transparency and quality of service. These principles have always been important to how Vanguard operates and are reflected in our multi-asset range of funds, ETFs and managed portfolio solutions (MPS).

As the multi-asset sector continues to develop and access to industry data increases, it is helping shed light on what our own research has consistently shown: that keeping costs low is one of the cornerstones of investing success and helping investors achieve their long-term outcomes.

Notes:

¹ Source: European Securities & Markets Authority (ESMA). Calculations based on the percentage change in total ongoing costs for main retail investors’ asset classes for EU27 UCITS, between 2017 and 2021. For further information, please see ESMA Market Report: Costs and Performance of EU Retail Investment Products 2023

² Source: European Securities & Markets Authority (ESMA). Average costs for equity, bond and multi-asset funds are based on EU27 UCITS for the 2021 reporting period. Includes ongoing costs and subscription and redemption fees. 

³ Source: Refinitiv Lipper, European Securities & Markets Authority (ESMA). Based on EU27 UCITS annual performance over the 10-year reporting period 2012-2021, net of ongoing costs, subscription and redemption fees. Calculation in EUR. 

⁴ Source: Vanguard research using Morningstar data as at 31 December 2022.

⁵ Source: Vanguard. Based on total AUM invested in multi-asset funds in the UK as at 31 December 2022.

⁶ Based on Vanguard’s research of single-asset bond and equity mutual funds and ETFs. For more information, see The case for low-cost index fund investing, March 2022.

⁷ Morningstar divides multi-asset funds into flexible and static allocation categories. Funds with relatively static asset mixes are further divided into equity allocation ranges; 40-60% Equity Allocation, for example.

5 year rolling return performance

Source: Vanguard/Morningstar as at 31 March 2023.

Past performance is not a reliable indicator of future results.

Peer group is defined as the Morningstar category, including UK, Luxembourg and Irish domiciled MFs and ETFs (all share classes). All returns shown are in GBP and net of fees.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

Performance may be calculated in a currency that differs from the base currency of the fund. As a result, returns may decrease or increase due to currency fluctuations.

Some funds invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall. Investments in smaller companies may be more volatile than investments in well-established blue chip companies.

The Vanguard LifeStrategy® Funds may invest in Exchange Traded Fund (ETF) shares. ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid- offer spread which should be considered fully before investing.

Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.

The Funds may use derivatives in order to reduce risk or cost and/or generate extra income or growth. The use of derivatives could increase or reduce exposure to underlying assets and result in greater fluctuations of the Fund's net asset value. A derivative is a financial contract whose value is based on the value of a financial asset (such as a share, bond, or currency) or a market index.

For further information on risks please see the “Risk Factors” section of the prospectus on our website at https://global.vanguard.com.

Important information

This document is directed at professional investors and should not be distributed to,or relied upon by retail investors.

For further information on the fund's investment policies and risks, please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions. The KIID for this fund is available, alongside the prospectus via Vanguard’s website https://global.vanguard.com/

This document is designed for use by, and is directed only at persons resident in the UK.

The information contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document is general in nature and does not constitute legal, tax, or investment advice. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of shares and /or units of, and the receipt of distribution from any investment.

The Authorised Corporate Director for Vanguard LifeStrategy Funds ICVC is Vanguard Investments UK, Limited. Vanguard Asset Management, Limited is a distributor of Vanguard LifeStrategy Funds ICVC.

For investors in UK domiciled funds, a summary of investor rights can be obtained via https://www.vanguard.co.uk/content/dam/intl/europe/documents/en/Vanguard-InvestorsRightsSummaryUKFUNDSJan22.pdf and is available in English.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2023 Vanguard Asset Management Limited. All rights reserved.