Investment Portfolios and Funds Implementing A Core Retirement Portfolio

Institutional investment providers such as pension companies, invest most peoples’ pensions in standard globally diversified portfolios of equities and bonds. This is because time has proven this strategy to deliver investment returns over the longer term. The funds and ETF's listed below implement a similar globally diversified investment strategy.

The easiest way to setup a globally diversified portfolio as part of your core portfolio is to simply invest into one or more of the global equities funds provided by the big institutional investment houses such as State Street, Vanguard, iShares etc. As the image below indicates, this should form the lions share of a portfolio as it provides the most bang for your back in terms of reward to risk and long term growth.

More adventurous investors could then choose to set up smaller satellites around the core such as a growth oriented ETF like a tech fund or some other 'factor' ETF like a 'quality' focussed fund.

Performance & Geographical Exposure

The 5-year return shows the most recent medium-term measure of performance. Past performance is not the best indicator of future performance but it’s still a factor to consider.

A major factor to consider is which regions the fund is invested in. VWRL has a large exposure to the US which, in recent times, has been at historically high valuations. There is a risk that over the next decade this could lead to diminishing returns compared to the Life Strategy fund which has a lower exposure to the US.

The Core Funds

The Vanguard Life Strategy fund is a low-cost Index Tracker or ETF providing a defined equity/bond mix along with built-in global diversification. Automatic and active re-balancing is included and there is an added bonus of a yield/dividend paid to the investor (although in the ‘accumulation phase’ when you’re building your pension pot, it’s likely that dividends are just re-invested). 

The Life Strategy fund above is the 100% equities version and is what I currently hold for the bulk of my ‘Core’ investment. The review below expands on the different Life Strategy fund equity bond mixes offered by Vanguard:-

Vanguard Life Strategy ETF Review: CLICK HERE (opens new tab)

The Vanguard Life Strategy 2040 Retirement fund is shown above for comparison purposes. This fund targets a particular retirement date and uses a standard algorithm to increase the bond allocation as you get closer to your target retirement date. Once again, as a DIY investor, I prefer to keep things flexible and just go for the standard Life Strategy fund.

The Vanguard FTSE All-World UCITS ETF (Ticker: VWRL) is one of the biggest and most well known Global Equities ETF on the market. Total cost 0.22% (Total Expense Ratio) for access to over 300 companies in over 40 countries. This tracks the worlds biggest stocks based on market cap. Caveat: this means you will have a bias towards US stocks as it contains a lot of the worlds largest companies. Don’t forget, these Vanguard funds are available on most major online brokers, not just on the Vanguard platform:- 

• Hargreaves (new tab)

• AJBell (new tab)

But I already have UK equities in my Portfolio?

The Vanguard FTSE Developed World ex-U.K. Equity Index Fund invests in equities across the globe outside of the UK. This could be used for an investor who already has a sizeable enough UK allocation for example. This was declared the most consistent global tracker on the market by Trustnet. High praise indeed! Click here for the article.

This fund has done well for the years in the table above because the UK has been quite a ‘laggard’ compared to global equities. This is why, in recent times, home bias has been shunned by most independent financial advisors, as better returns with less risk can be achieved with the standard globally diversified funds.

Pension Bee

And what of the Pension Bee Tracker Fund above? It’s tempting to look at the returns on the Pension Bee pension fund and think that it isn’t as good as the Vanguard Funds. The Pension Bee tracker pension is managed by State Street, a major Investment Manager.

The reason their tracker fund has not performed as well as the Vanguard funds is purely down to the lower US allocation. Even 3 or 4 years ago, the US stock market was considered overpriced so it would appear they made a call to lower the US equities allocation which at the time would have made sense.

Vanguard, with a higher US equities allocation, therefore took more risk which paid off. It could well be the case that the Pension Bee Tracker fund will outperform the Vanguard funds over the next 5 years as the US stock market is now even more over-valued.

This is why we are constantly told 'past performance is not an indicator of future returns'. It is quite simply the truth, the whole truth, and nothing but the truth when it comes to investing.

Nutmeg & Robo-advisors

‘Robo-advisors’ such as Nutmeg in the UK should offer a similar performance to the funds above. For a zero-effort ‘set and forget’ provider with a good reputation, Nutmeg is a viable option, whereby they determine your risk appetite and then slot you into a ready made portfolio. Nutmeg then re-balances these portfolios at different time intervals depending on if you choose their ‘active’ option, or less frequently rebalanced but cheaper ‘non-active’ option.

The Nutmeg fund achieved 9% annualised return over 5 years period which is not bad at all… but pretty standard for these kind of funds. So this was roughly the same as the Pension Bee fund performance.

The issue with these Robo-advisors is fees. Whilst they are still low cost, the overall charge comes in at about 1% per annum which is on the higher side compared to the likes of Vanguard.

Why Stocks & Bonds?

When someone is closer to retirement age it is still the case that most pensions ‘rotate’ into a higher allocation of safer bonds from riskier stocks to protect the capital value of the pension.

Bonds reduce portfolio volatility (rise and decline in overall value). When approaching, or in retirement, most people want to maintain the value of the long term capital they have spent so much time building, rather than chase extra gains in risky equites.

Bonds & Busts & The Bond Bull Market of the Past 3 Decades

Bonds tend to be ‘uncorrelated' to stocks. What this means is that they tend to move in the opposite direction to equities/stocks giving a built-in protection mechanism against falls in equity/stock markets. However, Bonds have been driven up in price form the past 3 decades now.

Bonds deliver safer returns than volatile equities, so while they have utility in a downturn, they are still pricey and yields (returns) are therefore comparatively low. I currently have a low allocation to bonds for both my pension and ISA portfolios but may opt to ‘rotate’ into bonds from equities in a bear market (downturn).

DIY investors need to be aware of the stage they are at in their investment lifecycle. ‘Accumulation’ phase portfolios don’t necessarily need to be as concerned with bonds if they are generating as much growth as possible from equities before retiring. If someone is 5/10 years from retirement, the standard paradigm of rotation into bonds for capital preservation purposes is still the norm, but I’m just taking a bit more risk personally and going all in equities… for now.

My current view of bonds considering the above is to use them ‘tactically’ in the event of a bear market. Bonds are still the main ‘flight to safety’ asset and could still be used as such if needed…but beware... not all bonds are created equal!

Over time, equities outperform bonds. Bonds are great in years like 2008 and 2020, but otherwise, equities dominate for a host of reasons (reinvestment, compounding, inflation, economic growth. etc).

Why Global Diversification?

The UK accounts for 6 to 8% of the global stock market. If you have all your eggs in the UK basket you will not have exposure to all of the factors driving global growth:-

* A young educated workforce across developed Asia.

* Rising household income in China, India, Brazil.

* Natural Resources in Canada, Australia, Russia.

* The biggest market in the world… the USA.

* Europe!

Some sectors are less well represented in the UK such as Tech, healthcare, bioscience and robotics. Why would you not want exposure to market-leading US tech companies (when times are good), or Europe's leading consumer businesses, or Japan’s cutting-edge manufacturers, or the emerging worlds growing financial businesses?

Countries, industries, and currencies all perform well at different times so a global approach makes sense.

How Much to Allocate to the ‘Core’ Part of AN Overall Portfolio?

I have between 40% to 60% ‘Core’ allocation in my pension portfolio, and about 30 to 40% in my ISA. However, my ISA is also a pension to all intents and purposes so I may opt to increase the ‘Core’ allocation if the total returns are higher and I don’t need to take the dividends from the ISA as income. Again as a DIY investor, I have the option to do this.

KISS (Keep It Simple Silly)

The simple DIY option is to have the one fund (E.g. Vanguard's "Life Strategy"), set and forget, and leave the allocation and maintenance to Vanguard. Low maintenance frees up your time to concentrate on income-producing activities to accelerate towards your FIRE target. Makes a lot of sense.

Alternative Core Funds & Fund Providers

I have concentrated above on the Vanguard 'broker' (online platform provider of investment funds) but you may or may not already be invested on one or more of the other popular brokers out there. The funds and fund providers below link to some of the alternatives to Vanguard in the UK. Once again, a similar performance should be observed in these funds and platforms, so the main differentiators are fees and the service and services provided by the brokers. (These are not recommendations. If you are unsure about any investment you seek advice from a professional advisor.)

Note: The online broker investment platform links for each investment will be shown in a separate browser tab so you can easily refer back to this page.

BlackRock Consensus 85 Fund

Asset management giant BlackRock offers a set of funds called Consensus that do a similar job to the Vanguard Life Strategy funds but with maybe a slightly more flexible allocation between bonds and equities. For example, the ‘BlackRock Consensus 85‘ fund can be between 40% and 85% invested in shares. The funds typically cost 0.23%.

• Morningstar gives this fund 4 stars out of 5:- CLICK HERE (new tab)

• Trustnet gives a fund ‘crown’ rating of 3 out of 5 for this fund:- CLICK HERE (new tab)

• You Invest (AJ Bell) platform link for the BlackRock Fund:- CLICK HERE (new tab)

Model Portfolios by AJ Bell and Interactive Investor UK platforms

AJ Bell offers a range of funds running from Cautious to Adventurous. 

The Cautious fund contains bonds, cash-like assets, and a smaller allocation to stocks. The Adventurous fund is oriented more towards shares and high-yield bonds. Annual AJ Bell platform costs are capped at 0.5%, but with no custody charge and no charge to buy the funds on the platform.

• No rating on Morningstar:- CLICK HERE (new tab)

• No rating on Trustnet:- CLICK HERE (new tab)

Below is the link to the Adventurous AJBell fund. (This is the AJBell fund that is most comparable to the Vanguard LifeStrategy ETF):-

• YouInvest/AJBell investment platform link CLICK HERE (new tab).
  Compare this performance to the Vanguard Life Strategy fund in my Vanguard Life Strategy ETF Review: CLICK HERE (opens new tab)

Interactive Investor is another major UK platform offering model portfolios. CLICK HERE (opens new tab).

What are Your Core Investments?…