One of the most common questions I find myself addressing for people is the one we will focus on today.
The Vanguard LifeStrategy® 100 (LS100) and the FTSE Global All Cap Index Fund (FTSE All Cap) appear to be very similar on first glance but fundamental differences exist between the two.
This article will aim to broadly assess the similarities, differences and strategies that both funds take to hopefully clear up the confusion about which may be better for a UK investor to include in their portfolio.
Let’s kick things off with the similarities.
These funds are very similar in many ways, so below will be a long list of everything I think is worth noting. Some of it may seem rather obvious, but I do like to be methodical in my analysis.
- These funds are both owned and operated by The Vanguard Group. This means both are available on Vanguard’s UK platform and that they both can be held within the Vanguard Stocks and Shares ISA.
- Both funds are mutual funds and fall under all traditional mutual fund rules (in that they settle and trade after market close and can be bought in fractional units).
- Further to point 2, both funds can be bought as either income or accumulation variants.
- Both funds are invested entirely in stocks, though a bond component is available with the other variants of the LifeStrategy® series.
- Both funds have a Vanguard risk ranking of ‘5’.
- Both funds hold thousands of stocks spanning industries and countries all across the world.
- Both funds hold physical securities and do not engage in synthetic replication.
- Both funds are passive in nature… Sort of. Rather paradoxically this falls under a similarity and a difference at the same time. The strategy by which both funds acquire new holdings is via index fund purchasing, but LS100 has particular ratios that are actively chosen ahead of time – more on this below.
The devil is in the detail for the key differences.
As we have seen the funds share a lot of the same goals and arguably serve an identical purpose within a portfolio; to own both would be rather redundant and would provide little to zero diversification benefit.
- The ongoing cost for each fund is the first discrepancy. Currently, LS100 has an OCF of 0.22% and FTSE All Cap has an OCF of 0.24%, meaning it costs 0.02% more in fees to own FTSE All Cap over LS100.
- Vanguard designed the LS funds as a ‘portfolio in a box’ choice for the more ‘hands off’ investor; simply pick an asset allocation, set it and forget it. LS100 is a fund of funds. FTSE All Cap is simply a single tracker.
- FTSE All Cap has more emerging market and small cap exposure. LS100 sits around 7% and FTSE All Cap is in the region of 10%.
What does each fund aim to accomplish?
FTSE All Cap has the simplest objective of the two and simply aims to track the FTSE Global All Cap Index as closely as possible. This index uses market capitalisation to determine allocation and is entirely passive in its method of doing so. This means we can easily evaluate the tracking error of the fund by seeing how close it is to the benchmark it is tracking.
LS100 on the other hand is a ‘fund of funds’. This product aims to give exposure to large cap companies around the world and uses a mixture of Vanguard funds to achieve this. LS100 is passive in the sense that its underlying funds are passive, but has an ‘active’ element as the ratio of those funds is determined by the fund manager. For example, about 25% of LS100 is invested in the UK (mainly in the FTSE 100, but some FTSE 250 is sprinkled in too). Contrast this to the actual market cap weight of the UK at around 5.5% of the global economy and we can see there is a home bias here.
Unlike FTSE All Cap, LS100 doesn’t have a single benchmark we can use to evaluate it with. It is also worth considering that Vanguard can therefore tweak the exposure of LS100 as and when they see fit (and they have done in the past). With FTSE All Cap you get a lot more transparency in regards to how it will be shaped in the future.
Is a home bias worth bothering with?
A home bias is simply when an investor overweights their portfolio with investments into the country in which they live that significantly deviates from global market cap. The reasons behind this seem to be familiarity with the ‘home turf’ (in that we feel more reassured and knowledgeable if we are buying slices of companies we see on the high street and on the news) and in reducing foreign currency exposure.
Interestingly it appears that the average UK investor has a 30%~ home bias in their portfolio, so in that sense LS100 has an allocation that one may expect – but it still overweights the UK by a shade under 5x compared with FTSE All Cap.
With all that in mind, what should I choose?
With all things considered, even those key differences are quite minor over the long term. In reality the UK has historically matched very closely with the rest of the world (about 6% real return for the past century) so the truth is it probably doesn’t matter. But if you’re a diligent bogle-head type investor and fearful of betting slightly more on the UK economy, shoot for FTSE All Cap.
As long as you’re investing in one of them, you’ll be just fine!
A worthy note (that may further add confusion!) is a third fund that exists called ‘FTSE All-World ETF’. I didn’t include this in the major write up but it is something to consider if you prefer FTSE All Cap to LS100 but want none of the small cap exposure.