How well did your asset manager weather the market storm?

September 15, 2020

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Commentary provided by the Index Strategies Team, Portfolio Review Department

Weather Graphic

In our many decades in financial markets, we have seen massive bull runs and sudden downturns, but nothing quite like the first quarter of 2020. Many have described that quarter’s market environment as unprecedented or extraordinary—and rightfully so. We saw U.S. stocks fall more than 20%¹ and international stocks drop 24%² while U.S. interest rates reached record lows, all over a fraction of the time it took for markets to reach similar levels in 2008.

Markets rebounded rapidly in the second quarter. U.S. stocks, as measured by the S&P 500, climbed 20%, the largest quarterly increase in decades. But we anticipate more volatility, so the first half of 2020 offers a crucial opportunity to assess how well your asset manager performs in periods of large market swings.

Here at Vanguard, we have a term for times like these: "Vanguard weather," periods of financial turbulence when Vanguard’s disciplined, low-cost, and long-term approach to investment management serves investors well. Despite recent extreme volatility and broad uncertainty across virtually every global capital market, our firm’s multilayered contingency plan performed without a hitch. As a result, our index mandates tracked their benchmarks, and our shareholders stayed the course.

Vanguard’s business—and our clients’ portfolios—are built to withstand even the most severe storms. Even amid the exceptional volatility caused by the COVID-19 pandemic, the outcomes at Vanguard were largely business as usual. Here’s a look at how our sophisticated, risk-controlled approach to indexing delivered the value that clients have come to depend on from Vanguard over the decades—and the crises that came with them.

Layers of protection helped ensure trading continuity

Over the course of two weeks, 98% of Vanguard’s more than 18,000 crew members moved from in-person to remote work. Critical investment teams like Vanguard Fixed Income Group (FIG) and Equity Investment Group (EIG) split themselves between trading floors, contingency hot sites, and fully operational home offices in Pennsylvania, England, and Australia. From these locations, we created multiple levels of support to ensure Vanguard’s global trading platform, and the funds managed on it, operated continuously and efficiently day after day.

Experienced hands helped keep portfolios on course

Due to increasingly unpredictable movements of constituent securities, volatile markets make it harder for index fund managers to track their benchmarks. In the first quarter, as in prior crises, the correlations of security returns within asset classes broke down, likening portfolio management to trying to hit a moving target from a moving vehicle. In addition, severe liquidity crunches across fixed income sectors and even in corners of the global equity markets widened spreads and increased scarcity of large swaths of securities.

Fortunately, Vanguard’s seasoned, experienced portfolio and investment risk management teams have decades of experience successfully managing equity and fixed income index portfolios through even the toughest days of the market cycle. Our disciplined, risk-controlled investment process tightens up as volatility increases. We deprioritize the pursuit of value-added opportunities to focus solely on tracking. This dynamic approach helps keep risk in check and our funds aligned with their benchmarks.

Vanguard’s reputation and size can improve liquidity

Unlike equity markets, which are centralized and automated, fixed income securities change hands in dealer-driven markets with liquidity largely provided by participant activity and the balance sheet capacity of those dealers. Large percentages of marketable securities do not trade on a daily basis. When markets go haywire, participants decrease or eliminate trading activity, and dealers—who take on meaningful risk when engaging in market-making—follow suit, restricting their transactions to all but a few partners.

FIG is an attractive partner in this environment. With 30 years managing fixed income instruments, and $1.75 trillion in assets under management,³ FIG offers scale and depth that continued to pay off for our investors through increased liquidity.⁴ Not only does this dynamic help support fund performance in the near term, it also helps enable Vanguard to construct some of the industry’s deepest and most seasoned fixed income index portfolios in support of long-term performance and investment objectives.

Figure 1 below shows the number of holdings in products benchmarked to the Bloomberg Barclays U.S. Aggregate Bond Index from Vanguard and several major competitors. While replication of the benchmark is not possible—for one, because many CUSIPs never make it past priority buyers and into the secondary market—the larger the proportion of the benchmark that must be optimized, the higher the tracking risk.

Figure 1: Greater number of bond holdings may help achieve tight tracking⁵

Bond Holdings Chart

There may be other material differences between products that must be considered prior to investing.

Securities lending and collateral management that bolster only one bottom line—our investors

Vanguard’s securities-lending program—which lends equities under the same philosophy and approach today as it has since well before the global financial crisis—is unique in its exclusive focus on benefiting our investors and not our bottom line. We adhere strictly to a "value-lending" philosophy, managing our counterparty credit limits and collateral pool internally through FIG. We also run our program at cost to eliminate the conflicts of interest inherent in virtually all other programs. Vanguard minimizes risks intrinsic in the program while maximizing benefits to clients. After all, fund investors shoulder the vast majority of the risk in a securities-lending program, so they should receive the majority of the reward. That is why Vanguard’s securities-lending program returns a higher percentage of gross revenue to the lending funds than most other major competitors.⁶

This remained true throughout 2020’s first quarter. As the market conditions created valuable opportunities, our securities-lending traders took advantage of those opportunities, our credit researchers kept a close eye on the solvency of borrowers, and our money market portfolio managers maintained almost 60% of the collateral reinvestment pool in weekly liquid assets during this quarter—nearly twice the amount required by law.⁷ The result? Positive excess returns generated in a risk-controlled manner, helping clients keep more of their investment by increasing net-of-fees returns.

Vanguard can provide stability, even when markets don’t

While we are proud of the results we’ve generated for clients over the years, instances of economic turbulence often come at a cost to markets, and to society. Never complacent, we will continue to invest in the people and processes needed to deliver no matter the circumstances—including Vanguard weather—hoping that these days are behind us, but knowing that if they’re not, we’ll be ready. And so will you.

¹ Source: CRSP U.S. Total Market Index.
² FTSE Global All Cap ex US Index.
³ As of December 31, 2019.
⁴ Source: Vanguard Fixed Income Group.
⁵ Source: Morningstar, December 31, 2019.
⁶ Source: Vanguard analysis of competitor statements of additional information.


  • All investing is subject to risk, including the possible loss of the money you invest.
  • Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
  • Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.