What caught my eye this week.

Seems that even Vanguard investors can be turned into – ahem – ‘tactical asset allocators’ if they are hit by one of the worst bond slumps for several generations.

Trustnet reports that in 2023:

[…] investors withdrew £426.2m out of Vanguard LifeStrategy 60% Equity, the largest fund in the [LifeStrategy] range.

Yet, Vanguard LifeStrategy 40% Equity was the most affected fund, as it shed £1.2bn, making it the most sold portfolio in the IA Mixed Investment 20-60% Shares sector.

Investors also shunned Vanguard LifeStrategy 20% Equity, taking out £404.6m from the smallest fund in the LifeStrategy range. As a result of those outflows, it was the most sold fund in the  IA Mixed Investment 0-35% Shares sector.

These are not inconsequential liquidations.

In the case of the LifeStrategy 20% Equity fund, it represents about a 25% outflow versus that fund’s size the year before.

Everybody hurts

While I believe that many of those taking money out of these funds are probably making a mistake, I do sympathise.

As I wrote when recapping the calamitous bond crash of 2022, the whole reason we own bonds is to (hopefully) make our portfolios less volatile.

Equities are where you go for thrills and spills. But bonds are meant to numb you into ignoring most of that action.

Great in theory, but at the time I posted that piece (late November 2022), the supposedly most-boring LifeStrategy 20% Equity fund had actually delivered the biggest one-year loss of all the LifeStrategy line-up.

That was not the game investors thought they were playing. So it’s not too shocking some have said “thanks but no thanks” and taken their marbles elsewhere.

Yet as both myself, The Accumulator, and many others have belaboured since the bond crash, that was then and this is now.

The sell-off in bonds made their yields reasonable again. That is key. It doesn’t rule out another bad year for bonds, but overall their expected returns over the medium-term are now much higher.

You may remember Vanguard itself gave us a forecast just before Christmas?

The fund titan said:

We expect UK bonds to deliver annualised returns of around 4.4%-5.4% over the next decade […]

That’s a huge difference compared to when quantitative tightening started in early 2022.

Indeed Vanguard was looking for just 0.8%-1.8% 10-year annualised returns as recently as the end of 2021, just before the rate-hiking cycle began

Sweetness follows

The ultra-low yields that prevailed for over a decade presented huge challenges for everyday investors – and for those who write about such things, too.

With hindsight, everyone would have liked to have sold bonds before they… repriced.

If only life were so simple.

Nevertheless, even before the sell-off somebody who was in the LifeStrategy 20% Equity fund probably didn’t have much capacity or tolerance for losses.

That was presumably why they were in that fund in the first place. And it wasn’t necessarily the wrong place for them to be.

Dreadful though a 10%-plus loss from a bond-heavy fund in a year might feel, that’s much less bad than the worst you’ll see from equities.

In fact a 15% down market is routine from shares every few years. (Try on a 30-50% crash for size.)

Shiny happy people

Presumably much of the money withdrawn from bond funds has gone into cash. That’s not the end of the world while interest rates are healthy.

A chunky holding of cash might not even be a bad long-term decision for some investors – though that money will likely underperform bonds if it stays in cash for long enough.

But if what was meant to be low-risk bond money held by low-risk investors has actually shifted into equities? That’s an accident waiting to happen.

We’ll have to wait and see. (And thus discover once again what only looks obvious with the benefit of hindsight.)

Want more? Learn why a diversified portfolio needs more than bonds.

Have a great weekend all. Hope your side does okay in the Six Nations, which has just kicked off. But better yet that my side wins!

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