Over the past 10 years, Vanguard has evolved our suite of fixed income products to help meet the needs of investors, which is why we created Vanguard Multi-Sector Income Bond Fund (Admiral Shares: VMSAX) three years ago this October.
VMSAX is an active credit fund that seeks to provide total return while generating a moderate to high level of current income.
Just as a three-legged stool remains steady on uneven surfaces, the three main components in VMSAX are designed to achieve stability and consistent income through exposure to three key asset classes—investment-grade corporates, high-yield, and emerging markets.
Each of these three sectors has historically provided higher yields than government bonds. Although spreads may widen when economic growth slows, the higher resulting yield versus government bonds is a positive for longer-term, income-focused investors.
Due to our consistent exposure to credit sectors and reduced reliance on floating-rate debt instruments, VMSAX has generally maintained a longer duration compared to the average fund in the multisector category. This allows yields to be locked in for a longer period—an especially valuable feature in a declining interest rate environment like the current one.
Since its inception, VMSAX has offered higher yields and longer duration than the category average.
Take a closer look at the three main components—all areas where Vanguard has experienced teams dedicated to each sector:
- Investment-grade (IG) corporates: IG bonds offer solid credit fundamentals and come with additional yield relative to U.S. Treasuries. The IG allocation should also usually act as a ballast against the two riskier sectors.
- High yield (HY): Yields on below-investment-grade bonds have historically tracked markedly higher than IG bonds. While credit default risk is greater in this sector, some of the risk traditionally associated with the high-yield market has shifted to private credit and leveraged loans. Moreover, most defaults tend to occur in bonds rated CCC or below, whereas our active team focuses on higher-quality BB- and B- rated HY bonds.
- Emerging markets: Once considered an investing backwater, many emerging markets countries have improved their fiscal and monetary practices. Still, yields in emerging markets have historically traded at levels comparable to U.S. high-yield bonds, with the benchmark for emerging markets duration currently exceeding seven years.
The design and investment process leads to three main points of differentiation against competitors:
- Transparent, true-to-label design: Our custom benchmark reflects the baseline exposures to our three main sectors and enables an easier comparison point of the fund’s performance than broad benchmarks commonly used for multisector funds (Bloomberg U.S. Aggregate Bond Index and Bloomberg U.S. Universal Index).
- Dynamic credit allocation at a low fee: The strategy enables investors to enhance their portfolios' yield by outsourcing credit allocation to an expert team that finds the best credit opportunities through market environments, all for a low fee of just 30 basis points for Admiral Shares™.
- Total return approach: Many multisector funds seek to deliver a high level of current income as a primary investment goal. However, Vanguard’s total return approach can allow for superior risk-adjusted returns over time.
The fund is led by three portfolio managers who each focus on one of the three main performance levers: Michael Chang, CFA, heading up high;yield; Arvind Narayanan, CFA, overseeing IG corporates; and Daniel Shaykevich, leading emerging markets. Together, they supervise a team of more than 60 traders and analysts.
Like all of Vanguard’s active fixed income funds, Vanguard’s investment process helps drive results. The senior investment committee guides macroeconomic and interest rate expectations. Traders and analysts provide bottom-up security selection recommendations to the portfolio managers, who make all final asset decisions.
VMSAX has a gross alpha target of 70 basis points of alpha over a custom credit benchmark. With a flexible investment mandate, three primary investment levers are expected to add outperformance:
- Security selection. Driven by Vanguard’s extensive team of sector specialist teams, the choosing of securities in areas rich in potential is expected to contribute most of the alpha.
- Sector allocation. Portfolio managers have broad discretion to dynamically overweight/underweight sectors based on opportunity.
- Duration and yield curve positioning. Tactical use of yield curve positioning is expected to contribute modestly to the alpha and holds the ability to optimize portfolio construction, but without making larger bets on hard-to-predict interest rates moves.
Notes:
- For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
- 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. Past performance is no guarantee of future results.
- 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.
- Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
- Bonds of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.
- High-yield bonds generally have medium- and lower-range credit-quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit-quality ratings.
- CFA® is a registered trademark owned by the CFA Institute.