Fund of the week ‘Our British investments have hit us the hardest’

Melissa Tuttle of Vanguard tells Harry Brennan how she helps to manage one of the most popular ‘tracker’ funds in times of turmoil

British savers poured £4bn back into investments in April as markets showed the first signs of recovery from the Covid-19 crash. More than half of this money went into funds that invest in shares. Global funds were the most popular choice. A total of £1.4bn went to “tracker” funds, which now make up almost a fifth of all funds.

Melissa Tuttle, a manager of one of the most popular global trackers, the £2bn Vanguard LifeStrategy 100, tells us how the “passive” approach functions in erratic times.

HOW DOES THE FUND WORK? We have five LifeStrategy funds, which are ready-made portfolios made up of stocks and bonds. But this fund, Life Strat egy 100, is 100pc stocks. It comprises a bunch of index tracker funds and exchange-traded funds. So when an investor buys ours, we go off and distribute their money into these underlying funds – we call this a “fund of funds” structure in the industry.

HOW HAVE YOU MANAGED THE FUND RECENTLY? Managing this type of fund during periods of volatility such as we are seeing now, mainly because of coronavirus, presents us with a challenge. When markets are choppier, the cost of trading tends to go up.

This is due to a combination of things, such as people selling or buying more often, which means we need to rebalance our holdings, but also because the difference in asking prices and the price at which assets sell on the markets – the “spread” – tends to increase. So a large team of us is here every day watching cash flows and checking the portfolio is balanced.

During Covid- 19, we have been watching markets very closely and assessing the trade-off between reducing how much we trade to keep costs down and what impact this has on our allocations. We are trying essentially to replicate, or track, markets and we do not want to drift too far away from

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HAVE YOU MADE ANY CHANGES IN WHERE YOU INVEST? We do not deviate from our predefined regional market allocations without a thorough review, otherwise people would be receiving the performance of something that is not what they thought they were buying into. So our allocation to more or less six major regions around the globe is fixed. It can be changed over time, but never on the fly.

DOES THIS APPROACH MAKE YOU LESS NIMBLE IN A CRISIS? Not really. A stock-picking manager of a European fund may have the freedom to try to find the best companies in the region and ignore those he thinks will drag on performance, which differs from our approach of tracking whole markets, but he is still constrained to that region. He can’t just go off and buy into emerging markets if he thinks they are good value, for example, as it would not be the fair to the customers who thought they were buying into European markets.

WHICH MARKETS HAVE HIT THE FUND THE HARDEST IN THE DOWNTURN? Having what we call our “UK home bias” has hit us hardest. We have this biased allocation to Britain as we understand that it is what our customers here want – in essence a global fund but with a good chunk of their money invested in their own domestic market.

Over the life of the fund range, which is approaching a decade now, the proportion has been slowly coming down. We’ve done that to balance customers’ desire to be in a market they tend to understand better with the benefits of spreading their money over a portfolio invested in all corners of the globe.

WHAT IS DRIVING THIS BRITISH UNDERPERFORMANCE? Everyone is dealing with coronavirus, but Britain also has the issue of Brexit, which is looming ever closer.

DO YOU HAVE MONEY IN THE FUND? All the leadership team of the LifeStrategy funds are invested.

DO YOU GET A BONUS? We do not get a bonus for “outperformance”, as we are not seeking to outpace the market but to track its movements. If the fund were performing far ahead of the market, it would be a sign something had gone wrong and I was taking on too much risk.

WHAT WOULD YOU HAVE BEEN IF NOT A MONEY MANAGER? A cardiovascular surgeon. I was a pre-med student at a hospital in Boston, Massachusetts. I was working at an asset manager to pay for my university education and ended up switching career.