Deciding to invest isn’t easy. Deciding what to invest in is even harder. Stocks, property, or bonds? Apple, Tencent or Pilbara Minerals? Are bonds worthless for young investors?

Multi-asset exchanged-traded funds (ETFs) offer to do all the hard work for investors. These funds blend different growth and defensive asset classes like equities, bonds and cash into a single product by investing in a handful of funds.

Funds are constructed to cater for different risk profiles like conservative, balanced and high growth, not dissimilar to products offered by superannuation funds.

Simplicity is attractive, and investors have flocked to multi-asset funds. The Vanguard Diversified High Growth (ASX: VDHG) has grown $1.2 billion dollars in size, since launching in 2017. These types of funds have grown in popularity as investors seek an 'all-in-one', low-cost, easily accessible option for the core of their portfolios. However, you take what you get. No 'customisation' here.

So, should you consider a multi-asset ETF?

Today we’re looking at Australia’s most popular multi-asset ETF, VDHG: what it owns, how it’s constructed and how sustainable it is.

The punchline? Morningstar fund analysts like VDHG. Manager research analyst Chris Tate calls it “one of the best options in the multi-asset space.”

“The passive approach is a decent way to go. You get top quartile performance fairly consistently without getting into non-traditional asset classes,” he says of the Silver-rated ETF.

That’s not to say VDHG is perfect. On sustainability VDHG may disappoint some investors.
Let’s get to it.

What are multi-asset funds

One of the most important decisions an investor makes is asset allocation: how much of a portfolio is put in the various asset classes, whether that be stocks, property, bonds, cash.

Investors are urged to diversify their holdings – avoid investing in single stocks, sectors or asset classes— as asset classes perform tend to perform differently over time. A mix of assets don’t rise and fall as one.

Where some focus on stock picking or market timing, most of a multi-asset portfolio’s long-term returns are driven by the asset allocation, says Vanguard’s head of investment strategy Aidan Geysen.

“For an index fund, close to 100% of returns are driven by asset allocation," he says. "Even for active funds, the vast majority of returns are driven by asset allocation.”

Multi-asset funds like VDHG are attractive because they do the hard work of asset allocation for you. They also rebalance the portfolio to ensure the allocations remain within certain ranges.

The appropriate mix of assets depends on investor’s risk tolerance and financials goals. They range from 30% growth / 70% defensive for conservative investors looking to protect capital to 90% growth / 10% defensive for investors able to stomach short term losses for longer term returns.

Vanguard caters to multiple risk profiles with its four multi-asset ETFs, ranging from conservative (VDCO) to high growth (VDHG)—today’s focus.

They’re united by an emphasis on global diversification and the traditional asset classes of equities, fixed interest and cash, says Geysen.

“With each of the funds, we want to provide broad exposure to the key asset building blocks and be globally diversified,” he says.

VDHG is 90% growth, 10% defensive and is recommended for those able to invest for a minimum of 7 years.

At a time when some superannuation funds are diversifying into exotic investments like private equity, Geysen says the fund’s philosophy is to let equities and bonds do the heavy lifting for returns and diversification.

“It can be a misnomer that more lines on the asset allocation table is more diversification,” he says.

“Exposures like private equity can have merit but its important that investors buy into the return variation that comes with it.”

What’s under the hood?

An investor buying one unit of VDHG—$60.79 as of writing—is actually buying one fund, that invests in seven other Vanguard funds, five equity, two bond:

Vanguard says it uses its own funds because it’s got a product range that covers the building blocks it sees essential.

Vanguard Australian Shares tracks the biggest 300 companies on the ASX by market capitalisation. Vanguard International Shares gives exposure to large, companies in the developed world – with a large component in the US market. Vanguard International Small Companies adds smaller global firms and its emerging market fund includes companies ranging from China to Latin America.

Morningstar counted 7,416 companies across the five equity funds.

VDHG’s two bond funds give exposure to investment grade bonds at home and overseas.

Vanguard doesn’t explicitly include a dedicated property or infrastructure fund in the mix—like Vanguard Australian Property (ASX: VAP)—because it gets exposure indirectly via the equities it owns.

The mix between each investment type is reviewed annually but Vanguard doesn’t adjust the weights of each category based on short term market trends—what’s known as tactical asset allocation.

Vanguard tends to make “modest changes” to asset allocation every three to four years. Over the long term, the trend has been towards more global exposure, says Geysen.

Tech, healthcare and small caps

VDHG's international stocks diversify it away from the miners and banks which dominate Australia. Basic materials and financial services are about 30% of the fund, versus roughly 50% for the ASX 200.

It also means greater exposure to technology, at 14% of all holdings versus around 4% on the ASX.

It is still very much an Australian and US centric fund. Almost 80% of those companies are in North America or Australia. Japan and the UK take about 6.5% between them with the rest spread across Asia, Latin America and Europe.

More than half of the companies in VDHG are smaller caps thanks to its 6.4% stake in the Vanguard International Small Companies Index Fund. There the median market capitalisation is US$5.4 billion versus $180 billion for Commonwealth Banks’s and US$2.5 trillion for Apple.

Performance and fees

VDHG’s growth assets have surfed the bull market. It returned a stomping 26.99% for the year ending August 2021.

The fund launched in 2017, but the unlisted version is almost identical and has returns going back to 2002. It’s returned 12.2% annually the last 10 years and 7.66% over 15—roughly what AustralianSuper’s chief investment offer calls the “underlying base return”.

Similar products from active managers trail over the long run. The neutral rated FirstChoice High Growth has a ten-year return of 11.3% after fees.

On a year-to-date basis, the BetaShares “All Growth” multi-asset fund (ASX: DHHF) led with 20.45% versus 17 .45% for VDHG. Longer term returns are not available for DHHF which launched last year.

VDHG’s fee of 0.27% is in the middle range of other multi-asset products—higher than DHHF (0.19%), lower than FirstChoice (1.12%).

High growth still has some defensiveness

VDHG offers investors some defensive characteristic through its 10% allocation to fixed interest and currency.

The allocation to bonds is controversial on Reddit. Some punters saying they’re a drag in today’s low interest rate environment.

The argument goes like this: The price of bonds increases when interest rates fall. Thirty years of falling interest rates meant rising bond prices and tidy capital gains. But interest rates are at zero and likely to increase. That means falling bond prices and capital losses ahead. That’s especially true of the long duration government bonds that VDHG holds.

Morningstar’s Chris Tate says there is some truth to this, but investors shouldn’t lose sleep.
“Those bonds have historically provided defensive characteristics in a declining interest rate environment. They’re not necessarily going to have the same defensive qualities they once did,” he says.

“But when you’re getting to the difference between 90% and 100% equity exposure, you’re not talking huge differences.”

Geysen says the bonds are “ballast” during market crises and are there for diversification, not returns.

In times of extreme turmoil bonds can still provide defensive attributes. Negative yielding German government bonds rallied 5% when equity markets crashed last March.

VDHG also offers defensiveness by holding a third of its international stocks unhedged in local currency.

For Australian investors, some unhedged international shares can offset equity market downturns. In crises, investors flee to perceived safety like the US dollar. It rises as the Australian dollar falls, boosting the relative value of US dollar denominated shares.

VDHG won’t tick every sustainability box

More and more investors want their money going to companies that consider the environment, respect workers and operate accountably—ESG friendly. Here VDHG may disappoint some.

Its Morningstar sustainability score is middle of the pack at the 52nd percentile. The score measures the ESG risk of the underlying assets.

Holdings like Woodside Petroleum and Exxon Mobil give the fund an 8.99% score for fossil fuel involvement, which tracks the portfolio’s exposure to fossil fuels.

Weapons manufacturers like Lockheed Martin, maker of the F-35 fighter jet, are also included.

Vanguard says the fund’s investment decisions do not “take into account labour standards or environmental, social or ethical considerations”.

Investors who want a high growth multi-asset fund can consider the BetaShares Ethical Diversified High Growth ETF (ASX: DZZF). The fund is in the top 3rd percentile of funds and has a fossil fuel score of 1.72%.

It holds three other ETFs: the BetaShares Global Sustainability Leaders (ASX: ETHI), the Australian Sustainability Leaders (ASX: FAIR) and the Sustainability Leaders Diversified bond ETF (ASX: GBND).