but with some additional trade-offs of the listed structure, including brokerage costs and variable bid-ask spreads. The AsiaPacific investment strategy group and global asset-allocation committee are responsible for setting and reviewing the strategic asset allocation. The methodology starts by defining reasonable investment horizons for each portfolio and alloates to broad asset-class exposures such as equities and fixed interest based on the defensive/growth split. Then, subasset allocation within classes follows a market-cap-weighting approach, while allowing for behavioural biases and regulatory factors specific to each local market. The SAA determination is aided by the Vanguard Capital Markets Model, which forecasts asset-class returns through scenario analysis. An annual review may identify major structural shifts that can lead to a revised SAA, such as a change in the taxation of an asset class. Underlying sector exposures are realised through in-house index-tracking funds. Vanguard does not use tactical asset allocation and cites illiquidity, low transparency,
and cost as reasons for avoiding alternatives
Portfolio
Vanguard’s straightforward approach applies a strategic asset allocation that is updated periodically and broadly mirrors its equivalent unlisted fund range. Dynamic and tactical asset allocation are not used. Vanguard sticks to the traditional asset classes of equities, fixed interest, and cash, while avoiding alternatives and unlisted assets. The four diversified options are designed to suit different investor objectives and risk profiles. Vanguard Conservative has a defensive/growth split of 70/30, Balanced is 50/50, Growth is 30/70, and High Growth is 10/90. In-house index funds are relied on. Vanguard’s SAA, inclusive of both listed and unlisted vehicles, is strikingly similar to the Morningstar Category benchmarks. It hedges 30% of the international equities to keep the non-Australian-dollar exposure roughly steady. Since inception to June 2021, Vanguard’s multisector ETFs have on average traded with a bid-ask spread of 8-25 basis points, though it has elevated during bouts of volatility like most listed structures.
Performance
The Vanguard Diversified Index ETFs were launched in November 2017. Given the consistency in approach to the long-running unlisted iterations, we believe its extended track record is more informative. Vanguard’s inexpensive cost has been a key pillar in leading this strategy to strong medium-term return. Returns have historically closely mirrored the Morningstar Category benchmarks over time, typifying the limited opportunity to exceed the hurdle given the structural likeness between the two. In comparison to unlisted peers, all ETFs sit in the top quartile over a trailing three-year time period as at June 2021. Calendar-year results between 2018 and 2020 have been consistently in the first and second quartiles, surpassing the average manager in each year. Maintaining interest-rate duration has aided peer-relative performance, particularly in the more-defensive options. This structural stance also helped amid the crisis market environment in the first quarter of 2020. Albeit, the more-defensive ETFs lagged the category average over the last year to June 2021 because of its higher allocation to defensive assets relative to peers. Record-low interest rates globally suppressed returns from fixed-income securities over this period but favoured growth
assets, resulting in the more-growth oriented portfolios keeping pace with peers.
Source: Morningstar
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
