‘You need to own bonds even when inflation is high’

Vanguard’s popular LifeStrategy 80pc fund has a fifth of its money in bonds. The firm’s Mohneet Dhir tells Danielle Levy why

The idea of not tinkering with your portfolio, even when you are faced with a geopolitical crisis, may feel bizarre. But for the team behind the Vanguard LifeStrategy fund range, it is a mantra that has seen them through tough times.

The idea behind these “multi-asset” funds is simple: keep your costs low and your asset split between shares and bonds static, and don’t try to time the markets.

Each LifeStrategy fund holds a different proportion of shares, which ranges from 20pc to 100pc; the remainder is in bonds. They invest in a collection of tracker funds and exchange- traded funds and cost 0.22pc a year. By comparison, actively managed multi-asset funds typically cost around 1pc.

So far, Vanguard’s approach has generated impressive returns. Over the past decade, the £7.4bn LifeStrategy 80pc Equity fund, the focus of today’s piece, has returned 146pc; “active” and “passive” rivals have both gained 90pc.

Mohneet Dhir, a multi-asset specialist at the American fund management giant, tells Telegraph Money why it is a myth that active fund managers can time markets.

WHO IS THE FUND FOR? With a product like LifeStrategy 80pc Equity you don’t need to tweak and move positions. It is designed to be a core long-term holding to see you through different market conditions. Typically, investors use it as a core holding or to complement other funds in their portfolio.

HOW DOES THE INVESTMENT STRATEGY WORK? The fund has a “strategic asset allocation”, which means the mix of 80pc equity and 20pc bonds stays the same: we don’t change it tactically. Historically, we know this mix has worked well in different market conditions.

We invest in Vanguard index funds because costs are important for us. We want to make sure we invest in things we understand and can keep overall costs low, so we can pass more return to investors.

Finally, the fund has a “home bias” to the UK of 25pc on the stocks side and 35pc on the bond side.

WHAT WOULD YOU SAY TO THOSE NERVOUS ABOUT INVESTING IN THE FUND AT SUCH AN UNCERTAIN TIME? Most people use our funds for longterm objectives, so inevitably there will be periods of market volatility. We believe the key is to keep costs low, so they don’t eat away at your returns.

Also, we don’t try to time markets. It is a myth that active managers can time markets. Research shows that being out of the market for just a handful of days can have a dramatic effect on your longterm returns. The key is to stay invested and avoid siren calls about people who are able to time the market. Maybe they can do it once or twice, but can they do it year after year?

Our fund offers fantastic diversification, with 23,000 underlying investments across 50 different markets. These economies and markets move in different cycles, so this diversification can be your friend. Finally, during every volatile period over the past decade our bond allocation has provided a much-needed buffer.

DOES THE FUND HAVE EXPOSURE TO RUSSIA? At the end of February, we had an extremely small exposure to Russian shares and bonds of 0.1pc of the fund. We continue to evaluate evolving global sanctions and the potential impact on our funds.

HOW WILL YOU PROTECT YOUR BOND ALLOCATION FROM RISING INFLATION? When central banks say they are going to raise interest rates in response to higher inflation, it causes bond prices to fall because over time inflation erodes the fixed income they pay. This affects the “price return”, but investors often forget to look at the “total return” on offer from the bond, as you have an income stream from the interest the bond pays. Sometimes, the price return can be negative but the total return can be positive if the bond pays enough interest.

Bonds are what you need in a portfolio when there is uncertainty because they provide a buffer. This is true even when inflation is high. As well as holding government bonds and

WHAT HAVE BEEN YOUR BEST AND WORST INVESTMENTS? Over the past decade the American stock market has been our best investment; it has experienced extraordinary growth. Spain has been the worst performing stock market.