LifeStrategy monthly flows jump to £1bn despite bond slump

LifeStrategy monthly flows jump to £1bn despite bond slump

Vanguard’s LifeStrategy multi-asset range took in a record £1bn in inflows last month, according to FTAdviser analysis, despite performance being hit by the government bond sell-off seen earlier this year.

Estimates from Morningstar show that the funds saw net flows of £986m in March, almost 50 per cent higher than the previous record month for the range.

The flows came despite the more cautious LifeStrategy offerings taking a knock from their exposure to government bonds. The two most popular strategies, the 40% Equity and the 60% Equity funds, are now fourth quartile in their respective Investment Association sectors over one year.

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Yet the 60% Equity fund was among those to post record flows in March, according to FTAdviser analysis of Morningstar data. Net flows of £500m were more than double the average seen over the prior 18 months.

Vanguard remains an advocate of the ‘60/40’ portfolio, a model that has increasingly come into question in recent years as investors fret over elevated bond valuations.

Government bond yields, which have hit a series of record lows over the past decade, moved higher in the opening months of 2021 as investors began to price in an economic recovery in the US in particular.

That shift, coupled with renewed worries about inflation emerging further down the line, saw the likes of US Treasuries and UK gilt prices stumble.

The £29bn LifeStrategy range has historically had higher government bond exposure than peers, and the effective duration of their bond holdings – ostensibly a sign of their sensitivity to interest rate rises – stands at a relatively elevated 10 years, according to Morningstar.

Vanguard said much of this duration was due to its positions in UK index-linked government debt, designed to provide protection against inflation rises.

It added the company remained convinced of the merits of holding conventional government bonds in portfolios.

Peter Westaway, chief economist and head of investment strategy group, Europe at Vanguard, said: “Our research indicates that the diversification benefits of bonds continue to play an indispensable role as shock absorbers in multi-asset portfolios, across the spectrum of interest rate environments.

“Even were bond prices to fall, total returns from bonds, though lower than in the past, would also be likely to remain positive over the long term as cash flows from rising yields were reinvested.”

The increase in flows seen in March is also further evidence of an industry-wide trend. Both retail and advised platforms have reported record results for the first quarter, with analysts at Numis suggesting record flows for Transact parent Integrafin were due to advisers securing additional investment courtesy of clients' "additional, Covid-forced savings".

As such, the latest flows do not necessarily indicate investors have backed Vanguard’s specific approach to fixed income investing.

And others remain concerned about the prospects for traditional balanced portfolios: fund manager Orbis said last week that a passive 60/40 portfolio continues to trade "near its most expensive level ever", and warned over bond valuations in particular.