It’s safe to say there are few people who would associate fixed income investing with gymnastics. But watching my daughter perform at her recent gymnastics competition—where I’m proud to say she performed like a champ—it occurred to me that the sport is similar in at least one respect to how Vanguard manages its active taxable fixed income portfolios, including our recently launched Vanguard Core Bond Fund.
Many consider gymnastics an individual sport, but there’s a significant team component. While individuals compete in events, how they perform directly impacts the success of the team. Performing to the best of your ability in individual events has a measurable and meaningful impact on your team’s overall score.
Like gymnastics, our approach to active taxable strategies in Vanguard Fixed Income Group involves the contributions of individual team members, all of whom contribute directly to the overall performance of our portfolios. This process includes dozens of portfolio managers, traders, credit analysts, risk analysts, and other investment professionals. Each member of our team draws on their deep expertise and diverse range of skills to contribute to the performance of our active strategies.
A focus on teamwork
Vanguard’s team-oriented approach to managing Vanguard Core Bond Fund and our other active taxable portfolios helps produce the right balance of independent thinking and collaboration. It starts with our senior strategy group, composed of senior investment leaders in Vanguard Fixed Income Group, Investment Strategy Group, and Risk Management Group. With an average of more than 20 years of fixed income experience, our senior strategy team, of which I’m a member, determines the overall allocation, sector exposure, and key risk factors of our portfolios. Our team also sets the strategic outlook and investment policies for these portfolios, including our macroeconomic outlook, duration and yield-curve positioning, credit-quality allocation, and broad sector allocation.
Our specialist teams, composed of selected portfolio managers, traders, and credit analysts, take a more targeted approach. Within the broad guidelines established by the senior strategy group, each specialist team has the flexibility to make overweights and underweights of particular sectors and issues.
Our team-based approach helps us make the best decisions in our portfolios for our investors and leverages the resources and capabilities of our entire organization, including portfolio management, trading, and credit research teams in the United States, United Kingdom, and Australia. This global presence lets us share local insights from a bottom-up perspective.
Vanguard Core Bond Fund: Seeking alpha with an emphasis on risk control
Vanguard Core Bond Fund will benefit greatly from our deep resources and team-oriented approach to fixed income management. By investing in a broadly diversified portfolio of bonds, including government, corporate, mortgage-backed securities, and asset-backed securities of varying yields and duration, our new core bond fund seeks to outperform the broad investment-grade market* and generate a moderate level of current income.
In addition to a strong and well-coordinated team behind it, Vanguard Core Bond Fund also offers a number of other potential advantages for those seeking an actively managed core bond fund holding.
Our decisions to limit exposure to high-yield bonds (5% of the portfolio or less) and impose tight duration constraints (+/–0.5 years relative to the benchmark) are two examples of the tight risk controls we have in place for our new core offering. Our emphasis on controlling risk is especially apparent when compared with other investment providers who also offer actively managed core bond funds but often take on more duration risk. Some have significantly higher exposure to high-yield bonds which can reduce the diversification benefits investors seek from a core bond fund.
With expense ratios less than a third the industry average for intermediate-term bond funds, our core bond fund offers a meaningful cost advantage that helps ensure that our portfolio managers aren’t pressured to take on unnecessary investment risks to overcome the performance drag caused by higher expense ratios.**
Unlike many other investment providers, our team-oriented approach to Vanguard Core Bond Fund and our other active taxable fixed income portfolios make us far less dependent on any one person for portfolio decisions. At Vanguard, there are no “star” managers or individuals who make all the key investment decisions. As a result, there’s no one person whose potential departure could leave investors vulnerable.
Just as each member of my daughter’s gymnastics team plays an important role in her team’s overall performance, so too do our fixed income professionals work as a cohesive unit for the ultimate success of their team—those who invest in Vanguard Core Bond Fund and our other active taxable fixed income portfolios. They say you’re only as good as the team behind you, and that’s certainly the case for gymnastics and fixed income investing.
*Investment-grade market refers to corporate bonds with a relatively low risk of default.
**As of March 10, 2016, the average expense ratios for AdmiralTM Shares and Investors Shares of Vanguard Core Bond Fund are 0.15% and 0.25% respectively. The average expense ratio of funds in the Morningstar intermediate bond fund category was 0.80% as of December 31, 2015.
- All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
- Investments in bonds are subject to interest rate, credit, and inflation risk.