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Does Vanguard’s LifeStrategy put DIMs to shame?

Compare the Vanguard LifeStrategy portfolio charges and performance to the median Discretionary Investment Managers (DIM) portfolio and advisers have to ask why they are using the latter, says Abraham Okusanya, MD of FinalytiQ

Investment management is undergoing a major transformation and the only people who seem oblivious to this fact seem to be investment managers themselves.

We are moving to a world where the cost of accessing the global equity market is effectively zero. Now that Beta is nearly free, chasing the elusive alpha has become even more expensive!

A case in point is Vanguard’s latest round of cost cutting, which pegs the cost of multi-asset portfolio at less than 25bps. That’s not surprising because Vanguard prides itself on striving to keep costs low for its investors.

Not only has the LifeStrategy beaten the average DIM portfolio by more than 6% over the last three years in every single category, it has done so with broadly similar volatility and drawdowns. DIMs should be ashamed.

What is rather shocking is the fact Vanguard’s plain vanilla LifeStrategy portfolios have outperformed the median Discretionary Investment Managers (DIM) portfolio, in every single category over 1 and 3 years. Here’s how the deck is currently stacked…

Abraham Vanguard LifeStrategy Vs DIMs.docx

If clients can access global asset allocation (with UK bias) and an automatically rebalanced portfolio for less than 25bps, what is the ‘value add’ for paying a DIM 5 to 10 times more, if a corresponding alpha isn’t delivered consistently? Of course, you could make the point about three years being too short a time frame and that it isn’t a full market cycle, given the bull market of the last five-years. That is all very valid and I’m not suggesting this is the Holy Grail of investing. But for me. it calls into question the value of DIMs, that can charge as much as 10 times the cost of Vanguard’s plain vanilla portfolio.

Advisers may well find that persuading clients to give up on chasing alpha altogether and to simply accept market return is a far easier task than outsourcing to a DIM and having to explain to clients why the DIM has underperformed.

The point is often made about how DIMs can offer downside protection in falling markets. Presumably, they would need to compensate for the gains foregone in rising markets and then some more?

They also purport to add value via tactical asset allocation, selecting best of breed funds and even using alternative assets. But it appears that all these efforts fall short when compared to plain vanilla low-cost portfolio, adopting global asset allocation (with UK bias) and disciplined rebalancing.

See also Abraham’s blog, where he compares the Vanguard LifeStrategy range to the Fidelity Index tracking range.

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