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The last three years have proven to be an ideal testing ground for bond funds. U.S. equity markets—and equity funds—saw both highs and lows. The first half of 2020 was particularly volatile, as stocks dropped 30% and interest rates reached record lows. Throughout it all, Vanguard Core Bond Fund produced steady returns and helped protect investors.
Turbulent markets, and especially a confluence of turbulent conditions, test the mettle of many investors. That's when Vanguard’s disciplined, long-term approach to investment management shines. Despite the recent turmoil, Vanguard’s tried-and-true approach to investing has kept shareholders on course.
“IT’S A TOUGH MARKET FOR INVESTORS—BUT FOR AN ACTIVE MANAGER WORKING TO ADD VALUE, IT’S THE BEST KIND OF MARKET.”
Principal and Senior Portfolio Manager at Vanguard
When markets are volatile, Vanguard’s disciplined, long-term approach to investment management shines. The three funds were selected as Vanguard Core Bond’s closest peers based on assets under management and prevalence in investor portfolios.
Sources: Vanguard and Morningstar, Inc., as of 9/30/21.
*For comparison, the benchmark index had a 3.32% return since Vanguard Core Bond Fund's inception.
The performance data shown represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so investors' shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. Data are adjusted for purchase and redemption fees, where applicable. Maintenance, low-balance, and service fees may be assessed by some funds. None of these fees are reflected in the performance figures. If these fees were included, the performance would be lower. For Vanguard fund performance data current to the most recent month-end, visit www.vanguard.com/performance. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Benchmark comparative indexes represent unmanaged or average returns on various financial assets, which can be compared with funds' total returns for the purpose of measuring relative performance. All four funds fall under Morningstar's Intermediate Core Bond category and have the Bloomberg Barclays U.S. Aggregate Bond Index as its benchmark (VCOBX has the float-adjusted version of the index as the benchmark). All have a focus on total return as their objective to varying degrees. There may be other material differences between products that must be considered prior to investing.
Vanguard’s actively managed fixed income funds follow a traditional, portfolio manager-driven process that uses both top-down and bottom-up inputs. But what sets Vanguard apart is its breadth of resources, collaborative culture and deep specialization.
As a large global firm, Vanguard offers clients a broad array of resources—from the economics team to sector specialists, to world-class technology platforms. And while others may rely on celebrity managers to drive performance, Vanguard takes a team approach that’s reliable and repeatable.
That collaboration happens on multiple levels and occurs early in the investment process. Senior managers regularly meet to discuss value opportunities across the entire investable universe, which ensures that managers with backgrounds in particular products don’t skew allocations to their primary areas of expertise.
“WE’RE A VERY COLLABORATIVE CULTURE; WE’RE NOT ABOUT STARS, WE’RE ABOUT TEAMS.”
Principal and Senior Portfolio Manager at Vanguard
Vanguard has been managing active fixed income for nearly four decades. As a large firm, Vanguard has strong sector teams and is well known for its standout corporate bond team. But Vanguard believes in continuous improvement: In the past decade, Vanguard strengthened its emerging-markets debt team, invested heavily in its mortgage-backed securities team and built a dedicated high-yield team.
The firm prides itself on the many employees who spend entire careers at Vanguard, and its investment teams have a level of experience and longevity rare in the industry. These well-resourced sector teams drive the bottom-up securities selection. Balancing these bottom-up opportunities with top-down strategies diversifies sources of alpha, which can help drive more consistent outperformance.
Vanguard has also invested heavily in technology and industry-leading software supporting portfolio management. For the most liquid markets, Vanguard traders use algorithmic trading to minimize trading costs. Keeping trading costs low helps Vanguard derive more value from active strategies, while our lower expense ratios let clients keep more of their returns.*
*Vanguard's asset-weighted average expense ratio in 2020 was 0.09% compared with 0.54% for the rest of the industry. Source Vanguard and Morningstar, Inc.
Fund performance may be paramount, but to build long-term value, it’s critically important to take a look under the hood to understand where the returns come from. Some funds make big market calls and routinely concentrate in certain sectors. Vanguard relies less on these types of bets as they can backfire. Instead, managers stick to fundamental views, take carefully measured risks and diversify their bets.
Managers can scale up risk when valuations look attractive and move to a more conservative strategy when appropriate. That approach paid off this year: At the start of 2020, valuations were high, with high-quality assets trading at the tighter end of historical ranges, when Covid-19 started to impact the global economy.
The managers reduced the fund’s exposure to credit sectors and increased holdings in cash and mortgages. They also avoided oil- and commodity-sensitive holdings.
Things changed quickly in March 2020 as valuations dropped dramatically. Managers rotated out of mortgages and cash and into underperforming sectors such as corporate bonds and emerging markets. As corporate bond spreads recovered in the months following, managers replaced expensive corporate bonds with higher-quality emerging-market bonds that were starting to benefit from the recovery. Then, as some valuations recovered to pre-virus levels, managers started deploying hedges, such as protection on the CDX indexes.
“WHILE WE DIDN’T FULLY ANTICIPATE THE MAGNITUDE OF THE GLOBAL PANDEMIC, WE RECOGNIZED THAT WE WERE NOT BEING COMPENSATED TO TAKE ON ADDITIONAL RISK, SO WE MOVED THE FUND TO A MORE DEFENSIVE POSITION.”
Portfolio Manager at Vanguard
Sources: Bloomberg Barclays indexes, J.P. Morgan EMBI Global Diversified Index. 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.
At Vanguard, clients own the funds that own Vanguard. This client-owned corporate structure eliminates potential conflicts of interest and keeps Vanguard’s interests aligned with those of its clients. The firm’s compensation structure encourages portfolio managers to focus on long-term performance without taking excessive risks. Performance bonuses for its investment teams are based on the funds’ performance over the preceding three-year period. Moreover, managers are not compensated for alpha beyond a certain threshold.
While taking measured risk to generate alpha, Vanguard’s Core Bond Fund stays “true to label,” maintaining a risk profile consistent with its mandate as a high-quality, diversified bond portfolio.
“Our clients know what they’re buying when they buy these funds. Our Core Bond Fund is not going to somehow morph into a high-yield fund one month because we happen to like high yield, or into an emerging market fund because we happen to like emerging markets,” says Quigley.
Markets will go up, down, sideways and through periods of volatility. These things can’t be controlled. But Vanguard’s proven track record demonstrates that it knows how to thrive in any kind of environment, through its vast resources, collaborative process and deep specialization.
Vanguard’s passive index products set the bar high for its active fund offerings.
“It keeps you honest, because if you’re not able to offer differentiated alpha, clients know there are alternatives even within Vanguard,” says Shaykevich.
For more information about Vanguard funds, visit vanguard.com or call 800-523-1036 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss. 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. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS® is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited ("BISL") (collectively, "Bloomberg"), or Bloomberg's licensors own all proprietary rights in the Bloomberg Barclays Indices. The products are not sponsored, endorsed, issued, sold or promoted by "Bloomberg or Barclays". Bloomberg and Barclays make no representation or warranty, express or implied, to the owners or purchasers of the products or any member of the public regarding the advisability of investing in securities generally or in the products particularly or the ability of the Bloomberg Barclays Indices to track general bond market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the products with respect to any person or entity. Bloomberg's only relationship to Vanguard and the products are the licensing of the Bloomberg Barclays Indices which are determined, composed and calculated by BISL without regard to Vanguard or the products or any owners or purchasers of the products. Bloomberg has no obligation to take the needs of the products or the owners of the products into consideration in determining, composing or calculating the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the products to be issued. Neither Bloomberg nor Barclays has any obligation or liability in connection with the administration, marketing or trading of the products.