I generally try to avoid recommending specific investment solutions. I’m a journalist, not a financial adviser, and in my view, almost every investor should seek professional advice, even if they only pay for a one-off consultation.
I say that because investing is an important and quite possibly life-long commitment. More importantly, we’re all unique, with different circumstances, goals and capacities for risk. There certainly isn’t one solution that’s right for everyone.
If, however, I really am pressed on the matter, my answer is always the same; it depends. If you choose to work on an ongoing basis with an evidence-based financial planner — which I genuinely believe is the gold standard — you should look for a planner who uses Timeline Portfolios. If, on the other hand, you would prefer, and are able, to manage your own investments, it’s hard to make a case for anything other than Vanguard LifeStrategy. (1)
Nobody has a crystal ball, and no one knows the optimal portfolio for the next few decades, but if you choose either Timeline or LifeStrategy and, crucially, you invest in a portfolio with the right level of risk for you, and stick with it through thick and thin, I have no doubt that you will enjoy a successful outcome.
But let’s say you had no preference either way. Which one’s better than the other — Timeline or LifeStrategy?
Well, it’s important to make a like-for-like comparison. Timeline’s portfolios come in four varieties: Tracker, Classic, ESG Tracker and ESG Classic. For the purposes of this comparison, I’m going to leave ESG aside. Vanguard does offer a range of actively managed ESG portfolios called SustainableLife, but, as yet, no passive equivalent to LifeStrategy.
I’m also going to exclude from this comparison Timeline Classic. The Classic portfolios offer exposure to key alternative beta factors such as the small and value premia, whereas LifeStrategy, at least for now, does not.
There is, however, a far more direct comparison to be made between LifeStrategy and Timeline Tracker. Both are positioned to capture market returns, using a global, market-cap-weighted equity index alongside a well-diversified fixed-income portfolio.
Also, Timeline Tracker and Vanguard LifeStrategy both offer a range of versions with varying levels of risk. For this exercise, I’m going to compare two funds in particular — Timeline Tracker 80 and the Vanguard LifeStrategy 80% Equity Fund. As their names suggest, both have an 80% allocation to stocks and a 20% allocation to fixed income.
Interestingly, the number of individual securities in each fund is very similar. There are 27,098 securities in Timeline Tracker 80 and 26,389 in the Vanguard equivalent.
Three big differences
There are, however, three main differences between the two funds.
1. LifeStrategy has a UK home bias
By far the most significant difference is that Vanguard LifeStrategy has a definite home bias, with approximately 22.97% of its equity holdings allocated to the UK market. The UK weighting of the Timeline portfolio is very much smaller at 4.05%.
The next biggest discrepancy in allocations between the two portfolios is in North America. US and Canadian equities make up 63.41% of the Timeline portfolio, and 50.87% in the Vanguard fund. This is the natural consequence of the Vanguard UK overweight being funded from all other regions.
Whilst the Timeline Tracker 80 has a higher weighting to Europe, the Pacific and Emerging Markets.
2. LifeStrategy has a bias towards longer-duration bonds
Another difference is in the fixed-income components of the two strategies. LifeStrategy has a bias towards bonds with longer durations. The average duration of the bonds in the Vanguard fund is 7.6 years, with an average maturity of 10.0 years and an average coupon of 2.8%.
The average duration of the bonds in the Timeline portfolio is shorter at 6.3 years in line with market duration, with an average maturity of 8.1 years and an average coupon of 2.9%.
Although the overall credit rating of the bonds in both portfolios is rated A, the average credit rating in the Vanguard fund is higher. Timeline Tracker employs a more diversified strategy and one that’s more neutral towards bonds with high credit ratings. It’s an approach which aims to steady the portfolio in periods of volatility and provide more stable returns over time.
3. Timeline Tracker is cheaper
As regular readers of this blog will know, the cost of investing has a critical impact on net returns, especially over longer periods. The less the investor pays in fees and charges, the higher their net returns are likely to be.
In this respect, it’s Timeline that has the edge. The total cost of Timeline Tracker 80 is 0.21%. This includes fund charges of 0.08%, transaction costs of 0.04%, and discretionary fund management (or DFM) costs of 0.09%
The total cost of investing in the Vanguard LifeStrategy fund is 0.25% — in other words, four basis points higher than the cost of the Timeline portfolio.
How have returns compared?
So now we’ve come to the really interesting part. How are the returns of Timeline Tracker 80 and the Vanguard LifeStrategy 80% Equity Fund compared?
Well, as you can see from the chart below, the Timeline Tracker has consistently outperformed the Vanguard fund over the last ten years, especially since 2020. The cumulative performance of the Timeline portfolio is superior to its LifeStrategy counterpart over one, three, five and seven years.
The difference in cumulative returns over seven years is particularly striking. Timeline Tracker 80 has returned 76.99% in that time, compared to 58.86% for the Vanguard fund.
What, then, if we adjust the relative returns of these two funds for risk? Again, Timeline comes out on top. The efficient frontier chart below shows that Timeline Tracker has consistently outperformed LifeStrategy across all levels of risk.
Over a seven-year period, Timeline portfolios (represented by the green line) have provided higher cumulative returns for the same or lower levels of volatility compared to Vanguard’s funds (represented by the grey line).
What of the future?
So, for the past ten years at least, Timeline Tracker is the clear winner. But we shouldn’t jump to conclusions about the next ten years.
It’s clear that Vanguard’s bias towards UK stocks and bonds has had a negative impact on performance. Timeline’s returns, on the other hand, have been boosted by the strong showing of US equities in particular.
Of course, all that could change in the next few years and hand an advantage to LifeStrategy. But trying to predict exactly when it will happen is virtually impossible. Timeline’s research shows that home bias is no longer relevant for UK investors. (2)
The other big imponderable is when small and value stocks will come back into favour. Large growth stocks have had the upper hand in recent years, which is why LifeStrategy has outperformed Timeline’s Classic portfolios.
For me, the evidence from Fama and French and others strongly suggests that the small and value will re-emerge at some point, but that’s only my opinion. There’s certainly no guarantee it will happen, and again, timing it correctly is a very tall order.
Whatever your take on UK stocks, factor tilts, and indeed on ESG, all we can be sure of is that discipline, low cost and broad diversification will continue to be the basic building blocks for investment success.
For that reason alone, I expect Timeline Portfolios and Vanguard LifeStrategy to remain my go-to fund picks for a long time to come.
References:
If you liked this article, you might want to explore 'Indexing can deliver over short periods too', 'Don't let politicians tell you how to invest', and 'Should you be 100% invested in equities?'.
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