Rebalancing portfolios back to their target weights every day and a broad exposure to all parts of the market are some of the reasons behind the strong performance of Vanguard’s popular LifeStrategy range in 2020. 
The ongoing coronavirus pandemic and the widespread lockdowns that followed it have caused economic activity to plunge and heavy falls in stock markets this year.
The LifeStrategy range – which comprises five multi-asset funds built from underlying Vanguard trackers – has not been immune to these difficult market conditions, with each one making a loss in 2020’s first quarter.
The chart below shows the losses of each fund, alongside the falls of the average fund in its sector. The colours have been co-ordinated to show which fund resides in which sector.
Performance of funds vs sector in Q1 2020
Source: FE Analytics
As can be seen, four of the five Vanguard LifeStrategy funds outperformed their average peer in the first quarter. Only Vanguard LifeStrategy 100% Equity has failed to do this with a third-quartile fall of 18.01 per cent.
In a client update, Vanguard said: “The LifeStrategy funds saw negative overall returns in the first quarter of 2020 as markets began to price in the economic damage of the Covid-19 pandemic.
“Performance was positive when compared to peer groups, which we believe was due to the structural benefits of strategic asset allocation, diversification and continuous rebalancing.”
Vanguard LifeStrategy 20% Equity put in the strongest relative performance as its 2.59 per cent loss during the quarter was the best result from the 54 funds in the IA Mixed Investment 0-35% Shares sector, where the average member was down 8.03 per cent.
A loss of 6.50 per cent put Vanguard LifeStrategy 40% Equity in the top quartile and made it the 18th best member of the 171-strong IA Mixed Investment 20-60% Shares sector. Its average peer lost 12.89 per cent.
In the IA Mixed Investment 40-85% Shares sector (where the average member was down 15.41 per cent in Q1, Vanguard LifeStrategy 60% Equity was ranked 28th out of 175 funds with a 10.43 per cent loss. Vanguard LifeStrategy 80% Equity, meanwhile, made a second-quartile loss of 14.28 per cent.
In its review of the LifeStrategy range’s performance in 2020’s first quarter, Vanguard highlighted the role of the three “structural benefits” mentioned above: strategic asset allocation, diversification and continuous rebalancing.
“The strategic asset allocation approach removes the pressure of making tactical decisions during periods of high market volatility, when market timing can be very difficult to execute well,” it said.
The strategic asset allocation approach used by the range is based around index funds. These either replicate the given index in full, as is the case with most equity portfolios, or they use sampling based on fundamental criteria, which is seen in Vanguard’s fixed income funds and some of the larger equity indices.
The asset management house argued that the use of sampling can have advantages in challenging conditions: “When market volatility increases and the probability of recession is high, sampling can enhance the fund’s exposure to securities with more favourable characteristics during periods of economic difficulty.”
Underlying funds of Vanguard LifeStrategy 60% Equity
Source: Vanguard
The first quarter presented investors with widespread falls in risk assets such as stocks, high yield bonds and emerging market debt. However, higher-quality assets like government bonds held up in this time of market stress.
Vanguard said this shows the importance of being diversified in such conditions. The £7.8bn Vanguard LifeStrategy 60% Equity fund, which is the largest of the range, offers exposure to 24,510 underlying holdings.
The group also pointed to the need to ensure diversification in fixed income holdings: “The outperformance of investment grade bonds over emerging market and high yield debt further underlines the importance of maintaining an exposure to high quality fixed income, which often acts as a buffer during periods of market stress.
“In addition, exposure to different bond durations across the curve has helped the LifeStrategy range to ride out the recent market turmoil relative to peer group averages.”
The exposure to fixed income holdings of different types also explains the underperformance of the Vanguard LifeStrategy 100% Equity fund, which only offers exposure to stocks.
The final “structural benefit” cited for the range’s outperformance was continuous rebalancing. The funds have a target asset allocation and one of their key features is an automatic rebalancing back to these targets.
“The LifeStrategy range rebalances daily, which can be a positive for a multi-asset fund in the market conditions that we saw in the first quarter,” Vanguard explained.
“The continuous rebalancing means that the LifeStrategy funds are effectively buyers of equities, where values are falling, and sellers of fixed income, where values are stable or rising.”
Looking ahead, the group said that “the short-term outlook is very difficult to forecast and market timing is even harder to execute”.
Vanguard’s latest economic forecast said that it expects the coronavirus crisis to cause “the sharpest global recession in recent history”. Growth in the US and Europe will likely contract as its steepest pace since at least the 1930s in 2020’s second quarter.
“But we continue to anticipate that the global recession will be short, with global growth turning positive in the second half of 2020,” it continued.
“That said, we expect the recovery will be U-shaped (where growth takes longer to recover) and that it will be at least the end of 2021 before economic activity returns to its pre Covid-19 level. We expect recovery to proceed in two stages, as we’re beginning to see in China: a bounce-back in growth as supply constraints recede, but a longer wait for demand to strengthen.”
Performance of Vanguard LifeStrategy funds over 5yrs
Source: FE Analytics
Over the past five years, all of the Vanguard LifeStrategy funds aside from Vanguard LifeStrategy 100% Equity have made top-quartile total returns in their respective sectors. The 100% Equity fund is in the IA Global sector’s third quartile.
All of the funds have an ongoing charges figure (OCF) of 0.22 per cent.