As I enter another financial year, my investment strategy remains straightforward.
My ISA consists of just two funds: the Vanguard ESG Global All Cap ETF (V3AA) and the Vanguard Global Aggregate Bond UCITS ETF (VAGS).
The past couple of years have been eventful in the investment world. 2022 presented significant challenges for global equity markets, with investors grappling with inflation spikes, interest rate hikes, recession concerns, and an ongoing energy crisis.
Against this backdrop, the Morningstar Global Markets Index fell by nearly 18%, while the Morningstar Global Corporate Bond Index retreated by 17.3%. Despite the turbulence, I stayed the course, ignoring market fluctuations.
In 2023, equity markets staged an impressive comeback, with the Morningstar Global Markets Index and the Morningstar US Large Cap Index surging by 22.13% and 27.82%, respectively, underscoring the unpredictable nature of financial markets.
Looking ahead to 2024 and 2025, unpredictability is the key theme. However, my strategy remains unchanged – maintaining a diversified, low-cost portfolio and avoiding attempts to predict the market's next move.
Let's dive deeper into my portfolio choices, starting with the equity component.
Vanguard ESG Global All Cap UCITS ETF
The Vanguard ESG Global All Cap UCITS ETF (V3AA) is my choice for the equity component of my portfolio. I generally avoid narrow ESG portfolios to maintain diversification, and this fund aligns with my preferences. It follows a comprehensive exclusion-based ESG process while retaining many of the diversification benefits of an unscreened global all-cap index.
The fund tracks the FTSE Global All Cap Choice Index, which excludes companies involved in non-renewable energy, vice products, weapons, and those deriving revenue from oil, coal, and gas. With nearly 6,000 stocks spanning developed and emerging markets and an ongoing charge of only 0.24%, it is one of the most cost-effective options for global large-cap equity exposure in Europe.
Vanguard Global Aggregate Bond UCITS ETF
For the fixed income portion of my portfolio, I rely on the Vanguard Global Aggregate Bond UCITS ETF (VAGS). This fund offers exposure to global government and corporate bonds and could serve as the sole fixed income component in a retail portfolio. With an ongoing charge of 0.10%, it maintains a significant cost advantage over its peers.
The ETF seeks to replicate the performance of the global investment-grade fixed income market by tracking the Bloomberg Global Agg index, which is weighted by market capitalisation. It provides diversification across geography, sector, maturity, and credit quality, with around 10,000 holdings, and exclusively invests in investment-grade bonds.
This fund has been challenging to hold over the past few years. In 2020, it landed in the second quartile relative to its active and passive Morningstar Category peers but fell to the third quartile in 2021 and the bottom of the fourth quartile in 2022. In 2023, it rebounded to the second quartile. Performance was supported by declining government bond yields stemming from subsiding inflation pressures and central banks starting to signal that monetary tightening has likely come to an end and we could start seeing rate cuts in 2024. The China underweight also helped. I'm glad I didn't sell this position in 2021 and 2022, as I would have crystallised my losses. It was particularly difficult to hold in 2022 when the fixed income portion of my portfolio didn't provide the expected ballast.
Passive funds covering the full maturity spectrum typically incorporate all the downside and are more vulnerable to periods of rising rates because of their inability to shorten duration. This has been a key drag on returns in the past couple of years relative to flexible approaches to the global bond market.
Vanguard LifeStrategy
Although no longer part of my ISA, having sold the position a few years ago, the Vanguard LifeStrategy series warrants mention for its diversification, cost-effectiveness, and strategic asset allocation.
The series' equity exposure starts at 20% in the most conservative portfolio, increasing in 20-percentage-point increments to 40%, 60% and 80%, until the most aggressive portfolio, which allocates 100% to equities and 0% to fixed income.
Vanguard's strategic asset allocation committee reviews each portfolio's allocations annually, leveraging research produced by the investment strategy group, whose thought leadership drives the decisions behind Vanguard's investment strategies.
The firm's research suggests that a market-cap-weighted approach delivers broad exposure and effectively diversifies a portfolio. Management eschews tactical tilts, actively managed underlying funds, and niche asset classes, and instead sticks with inexpensive, index-based exposure. The series' straightforward and efficient approach to delivering broad equity and fixed-income exposure should continue to serve investors well. These funds are very competitively priced at 0.22%.
The Ireland-domiciled UCITS ETFs maintain a global focus, while the UK-based funds available on the UK platform have a domestic bias. The UK-based funds allocate approximately 25% of the equity portion and 35% of the bond portion to domestic investments. Despite its strengths, my desire for a geographically unbiased portfolio led me to move on, reinforcing my commitment to global diversification.
Monika Calay is director of manager research at Morningstar
