Passive management specialist Vanguard has slashed the UK exposure in its range of multi-asset LifeStrategy funds to reduce their “home bias”.
Vanguard has reduced the weighting to UK equities across the range of five funds, bringing it down from 35 to 25 per cent of the LifeStrategy 100 fund, which is 100 per cent invested in equities.
The firm has overhauled the UK fixed income exposure in the funds due to the new ability to add global bonds into the asset mix.
The bond allocations in the LifeStrategy funds had previously been entirely in UK bonds because the Vanguard Global Bond passive fund was a fund of funds, which could not be included within the multi-asset range.
However, the firm changed the mandate on the Global Bond fund at the end of 2013 so that it invests directly in global bonds, and has now introduced that fund within the range.
The LifeStrategy range, which invests solely in Vanguard’s passive funds, consists of five products investing in a mix of equities and bonds.
Investors have the option of investing in a fund which is 100 per cent equities, or into funds with incrementally lower levels of equities and higher levels of bonds.
Global bonds now make up 70 per cent of the fixed income allocation across the range. In the fund with 80 per cent exposure to bonds, the global bond weighting has risen from zero to 56 per cent.
Peter Westaway, head of the investment strategy group at Vanguard, said the change was part of a drive by the group to encourage investors to invest in a more global manner and to avoid the “home bias” that affects a lot of decisions.
Mr Westaway cited an International Monetary Fund (IMF) survey that found that UK investors put 47 per cent of their portfolio into UK equities, in spite of the market only making up 9 per cent of the global index.
The figure of 47 per cent has declined significantly from a similar survey in 2001, which found that investors allocated 72 per cent of its equities to the UK market.
But Mr Westaway said investors should still be looking to diversify further geographically to better balance their risk.
He pointed to the fact that the UK index is heavily weighted towards sectors such as oil and gas, but has very little in other sectors such as technology, compared with a broader global index.
The case is similar in global bonds. Mr Westaway revealed Vanguard research which suggested that in periods of rising interest rates in the past 15 years, a portfolio of global bonds would have outperformed a portfolio of UK bonds each time.
Mr Westaway acknowledged there were a number of reasons why UK investors had a home bias, including the wish to invest in what they know and are comfortable with.
He said the acknowledgement of the home bias was why Vanguard had not taken its LifeStrategy funds entirely global, because investors may not like such a move.
However, he indicated that this was the direction in which the group wished to travel.
Vanguard reduces fees on LifeStrategy range to attract investors
In addition to overhauling its LifeStrategy range, Vanguard has been busy reducing its fees this year as part of an ongoing battle among passive providers to attract investors.
The latest fee cut came last week when the firm revealed it had lowered entry costs for new investors in its UK equity tracker funds, the Vanguard FTSE UK Equity Index fund and Vanguard FTSE UK Equity Income Index fund.
Previously, new investors in the funds had to pay a 0.5 per cent dilution levy imposed to cover the stamp duty costs of buying the underlying shares.
However, the removal of stamp duty, announced in last year’s Budget but implemented last week, means the levy has fallen to 0.4 per cent.
Adam Laird, passive investment manager at Hargreaves Lansdown, welcomed the latest in a string of charge reductions, which he said was “great news for investors”.
He said the removal of stamp duty would mean an overall lowering of investment costs across the board.
The reduction in its dilution levy follows Vanguard’s decision at the start of this year to reduce charges on its LifeStrategy range.
Previously charges for the five funds ranged from 0.29 per cent up to 0.33 per cent, but now they all charge 0.29 per cent.
