Active taxable bond funds

Transcription

1 THE VANGUARD APPROACH Active taxable bond funds Through our experienced team; collaborative, risk-controlled process; and unique cost advantage, we strive to consistently provide competitive returns without taking undue risk. FOR FINANCIAL ADVISORS ONLY. NOT FOR PUBLIC DISTRIBUTION.

2 Who we are 1 Vanguard Fixed Income Group manages more than $1 trillion in assets. Those assets include $161 billion in active taxable bond funds, $514 billion in taxable bond index funds, and $183 billion in taxable money market funds. Our experienced, 75-person taxable team consists of portfolio managers, credit research analysts, research associates, and traders. Government Credit Overview: Funds and performance Vanguard active taxable bond funds 4 Broad investment-grade market VCOBX Core Bond VFIRX Short-Term Treasury VSGDX Short-Term Federal VFSUX Short-Term Investment-Grade VFIUX Intermediate- Term Treasury VFIDX Intermediate-Term Investment-Grade VUSUX Long-Term Treasury VWETX Long-Term Investment-Grade 6 Specialty VUSFX Ultra-Short- Term Bond VAIPX Inflation- Protected Securities VFIJX GNMA 5 VWEAX High-Yield Corporate 5 Money market VUSXX Treasury Money Market 7 VMFXX Federal Money Market 7 VMRXX Prime Money Market 8 1 Data as of December 31, Expense ratio advantage yield and quality Vanguard s client-owned structure means we can provide services to our funds at cost, 2 which results in an average asset-weighted expense ratio that s about one-fifth the industry average. 3 This cost advantage helps Vanguard s taxable bond funds provide competitive yields in portfolios that remain focused on high-quality, investmentgrade securities. Also, our influence in the marketplace has helped us build strong relationships with traders, which we leverage in an effort to keep transaction costs as low as possible. 2 Vanguard provides its services to the Vanguard funds and ETFs at cost. 3 As of December 31, 2016, Vanguard s average asset-weighted expense ratio was 0.12% and the industry average asset-weighted expense ratio was 0.62%. Sources: Morningstar, Inc., and Vanguard. Industry average excludes Vanguard. Source: Vanguard. 4 For funds with multiple share classes, the ticket indicates the Admiral share class. 5 Managed by Wellington Management Company LLP. 6 Managed by both Vanguard Fixed Income Group and Wellington Management Company LLP. 7 You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time. 8 The Fund is only available to retail investors (natural persons). You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The Fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time. Consistent compelling returns Percentage of Vanguard active taxable bond funds whose returns beat their peer-group averages. 9 73% 90% 90% 90% 1 year 3 years 5 years 10 years 9 Periods ended December 31, Notes: For the one-year period, 16 of 22 Vanguard active taxable bond funds outperformed their peer-group averages. For the three-year period, 18 of 20 Vanguard active taxable bond funds outperformed their peer-group averages. For the fiveyear period, 18 of 20 Vanguard active taxable bond funds outperformed their peer-group averages. For the ten-year period, 18 of 20 Vanguard active taxable bond funds outperformed their peer group averages. Results vary for other time periods. Only funds with a minimum one-, three-, five-, or ten-year history, respectively, were included in the comparison. For the most recent performance, visit our website at vanguard.com/performance. Source: Lipper, a Thomson Reuters Company. This performance is influenced by our emphasis on: Security selection. We strive for alpha through security selection and small, top-down sector and duration bets. High credit quality. Lower costs create less drag on returns, so we don t need to take big risks relative to benchmarks. Tight duration guardrails. We make only modest tilts in the duration of our funds.

3 Our core advantage A global and highly credentialed team Our fixed income group includes more than 140 investment professionals in the United States, the United Kingdom, and Australia. This global presence lets us tap local insights and apply a bottom-up perspective. More than one-third of our investment professionals are CFA charterholders and more than half hold advanced degrees. Our senior leaders average more than 20 years of investing experience, and all have been at Vanguard at least 15 years. Of the investment professionals in our fixed income group, more than half are focused primarily on the management of actively managed taxable fixed income assets. A closer look at our active taxable bond team Title Senior strategy group (the Hub) Average Vanguard tenure Average investment experience Portfolio managers Traders Credit research analysts Credit research associates Source: Vanguard. Investment professionals In addition, the active taxable team periodically draws on the expertise of our active, index, and municipal bond professionals. These include roughly 25 portfolio managers and traders who cover our taxable index mandates, and about 40 portfolio managers, traders, and credit research analysts and associates on our municipal bond team. Extensive investment strategy and risk management support Our active taxable bond team additionally leverages the insights and expertise of two external groups: Vanguard Investment Strategy Group and Vanguard Risk Management Group. Vanguard Investment Strategy Group This group consists of approximately 60 researchers and economists in four global sites who provide research and insight into a variety macroeconomic and policy issues. Our senior strategy group and specialist teams use these insights extensively in the day-to-day management of our fixed income funds. Vanguard Risk Management Group Composed of more than 50 risk professionals, including quantitative researchers, data analysts, and portfolio analysts, the Vanguard Risk Management Group partners with Vanguard Fixed Income Group to: Evaluate, measure, and control investment risk. Proactively manage operational risks, to ensure that our people, processes, and technology continue to function as intended, such as by effectively controlling counterparty risk, derivatives, and other exposures. Perform quantitative research in support of the portfolio management process. Conduct detailed performance attribution, produce reports to assess a fund s liquidity, and create tools that help portfolio managers more fully understand risk factors present in the funds. 1

4 Our specialized, collaborative process The hub-and-satellite framework supports collaborative, consistent, and team-based management. This approach aims to achieve superior results by combining satellite specializations with multiple, diversified sources of alpha on a risk-controlled basis. The hub, composed of our senior leaders, provides a common operating framework through strategic positioning. It focuses on the tactical outlook and sets investment policies for actively managed fixed income portfolios, including the macroeconomic perspective, duration and yield-curve positioning, credit-quality allocation, and broad sector-allocation weights versus the funds benchmarks. The satellite teams are composed of portfolio managers, credit and risk management, and quantitative analysts, and traders. These teams, using parameters and risk budgets set by the hub, construct assigned portfolios in a bottom-up manner, focusing on issuer and security selection and subsector allocations. Issuer and security selection is achieved through a thorough collaboration between the hub and satellite groups. Analysts, working at the subsector level, conduct valuation comparisons in their assigned sectors and perform fundamental research on issuers and securities. Then they consult with the trading desk, applying additional inputs, and provide recommendations to satellite group leaders. Finally, the resulting mandates are implemented by the portfolio manager and trader teams. agency/volatility MBS/ Treasury/TIPS RATES TEAM SENIOR STRATEGY GROUP Structured products Investment-grade corporate CREDIT TEAM Emerging markets noncorporate Hub: Senior strategy group Establishes investment policy and strategic outlook. Develops overall, credit, and rates risk budgets. Oversees investment process and monitors risk budgets. Rates team Credit team Allocate and monitor risk across their respective satellite teams. Satellite: Specialist teams Execute subsector portfolio construction and research. Identify and invest in attractive subsectors, issuers, and individual securities. Source: Vanguard. 2

5 Our senior strategy group John W. Hollyer, CFA Is a principal and global head of Vanguard Fixed Income Group, which manages over $1 trillion in assets. He is responsible for the group s portfolio management, strategy, credit research, trading, and planning functions. He joined the company in 1989 and previously served as head of the Risk Management Group, which focuses on global investment and operational risk issues for Vanguard Investment Management Group. Hollyer also served as portfolio manager for a number of Vanguard s bond and money market funds. Hollyer, who has nearly 30 years of investment management experience, is a CFA charterholder and has a B.S. in economics from The Wharton School of the University of Pennsylvania. Christopher W. Alwine, CFA Is a principal and head of the Municipal Bond Group at Vanguard. Alwine joined Vanguard in 1990 and has more than 25 years of investment experience. Alwine leads a team of 30 investment professionals. His team manages 13 municipal bond funds. Alwine has served in multiple roles throughout his career in Vanguard Fixed Income Group. His experience includes trading, portfolio management, and credit research. His portfolio management experience spans both taxable and municipal markets, as well as active and index funds. Alwine earned a bachelor s degree in business administration from Temple University and an M.S. in finance from Drexel University. Joseph H. Davis, Ph.D. Is a Vanguard principal and the global head of the Investment Strategy Group, whose research and clientfacing team develops asset allocation strategies and conducts research on the capital markets, the global economy, portfolio construction, and related investment topics. As Vanguard s global chief economist, Davis is also a key member of the senior portfolio management team for Vanguard Fixed Income Group. Davis earned his B.A. summa cum laude from Saint Joseph s University and his M.A. and Ph.D. in economics from Duke University. Paul Jakubowski Is a principal and global head of credit in Vanguard Fixed Income Group. He has oversight responsibility for investment activities in the credit-related sectors of the taxable fixed income market as well as for taxable credit research. Jakubowski has worked in investment management since joining Vanguard in He earned his B.S. from the University of Richmond and his M.B.A. from Villanova University. Ronald Reardon Is a principal and global head of rates in Vanguard Fixed Income Group. He oversees investment activities in the rates-related sectors of the taxable fixed income market, including foreign exchange. Reardon has worked in investment management for Vanguard since He earned his B.S. from The College of New Jersey and his M.B.A. from the University of Rochester. Rodney Comegys Is a principal and head of the Risk Management Group, which focuses on global investment and operational risk issues for Vanguard Investment Management Group. Since joining the investment management team in 2008, Comegys has helped expand Vanguard s international business, launch new exchange-traded funds, and build processes and technology for Vanguard s equity systems. Comegys earned a B.S. in engineering and an M.Sc. in regional science economics from the University of Pennsylvania. He earned an M.B.A. from Harvard Business School. Anne N. Mathias, CFA Is a senior strategist in Vanguard Fixed Income Group, with a focus on global macro rates and foreign currency. She is responsible for analyzing interest rates, currency valuations, economic developments, and political risks for Vanguard s portfolio managers and investment staff. Mathias earned a B.A. from the University of Maryland and an M.S. in international affairs from Georgetown University s School of Foreign Service. She is a CFA charterholder and a member of the CFA Society of Los Angeles and the CFA Institute. 3

6 Rates and credit teams Our rates and credit teams, which are directed by global leaders who are also members of the senior strategy group, are responsible for allocating the risk budget across the various rate and credit sectors of the market. The rates team includes the heads of the rates specialist teams, such as Treasuries, TIPS, agencies, and agency mortgage-backed securities. They re responsible for allocating the risk budgets within the different rate sectors. They also develop the overall interest-rate risk budget and outlook (e.g., duration and yield-curve positioning) and make recommendations to the senior strategy group based on the research of its specialists. The team determines its outlook by examining three primary factors: the market, the economy, and economic policy. The credit team includes the leaders of the credit specialist, investment grade corporate, emerging markets, and structured products teams. Taking into consideration valuations, fundamentals, and technical factors, the credit team is responsible for relative value across the credit sectors and develops the outlook for the global credit market. Satellites: Our specialist teams Our specialist teams, composed of portfolio managers, traders, credit research analysts, and quantitative analysts, play a critical role in executing the top-down positioning and risk budgeting process established by the senior strategy group. They add value through credit quality allocations, subsector allocations, security selection, and tactical trading. Credit research and trading Our stable, tenured team, which includes more than 25 taxable credit analysts and associates, identifies potential opportunities or problems among any bonds or issuers of bonds that we own or are considering owning. Before selecting securities for our portfolios, these analysts perform an objective, thorough, and independent assessment of an issuer s creditworthiness and assign each an internal credit rating. This rating is determined through security-specific analysis within each assigned sector. For example, our corporate credit analysts review the issuer s projected, current, and historical financial conditions, and examine the overall industry in which the company operates. In contrast, our emerging markets and sovereign analysts examine monetary and fiscal policies and macroeconomic measures such as GDP and inflation. The different skills and knowledge required to effectively research these distinct sectors and markets is crucial and contributes significantly to the specialization and experience of our fixed income team. Our specialist team segments Rates satellites Treasury/TIPS MBS/Agency/Volatility Coverage universe U.S. Treasury U.S. Treasury Inflation- Protected Securities U.S. government mortgage-backed U.S. agency Volatility Credit satellites Investment-grade corporate Emerging markets/ Noncorporate credit Structured products Coverage universe Corporate securities Industrials Financials Utilities Non-U.S. government securities Sovereigns Foreign agencies Foreign local governments Supranationals Taxable municipals Securitized issues Commercial mortgagebacked securities Asset-backed securities Source: Vanguard. 4

7 Vanguard s liquidity management Vanguard conducts an ongoing assessment of liquidity risk based on a thorough review of various factors. This yields a dashboard of information that allows our portfolio managers to effectively gauge market liquidity as they put new cash to work or meet any net redemptions. Our liquidity assessment examines factors such as: Portfolio construction We calculate what portion of the portfolio is likely to remain highly liquid even in times of market stress. Liquidity of the underlying market We examine various metrics including market trading volumes, transaction costs, and the quality and breadth of diversification in the market. We also rely on qualitative information, such as the market structure, derivatives and financing, and securities lending markets. Historical levels of peak redemptions We review historical cash-flow data for each Vanguard fund and comparable non-vanguard funds to evaluate redemption activity during times of significant market stress. We consider the portfolio s construction, the liquidity in the underlying market, and the composition of the investor base to determine the potential impact of worst-case scenarios on the funds. Composition of the investor base Most Vanguard funds have a well-diversified shareholder base that includes investors of varying ages and with varying investment objectives. We pay special attention to situations where a large portion of a fund may be held by a small number of large investors, such as with a new fund, and manage its liquidity risk appropriately. Additional policies Our funds benefit from additional policies and resources designed to help us meet requests for redemptions and maintain the funds investment and liquidity profiles in all market environments. These include: frequenttrading policies, redemption fees, in-kind redemptions, and the use of interfund lending and lines of credit to meet significant net redemptions in unsettled markets. Active taxable bond funds Our taxable funds keep the majority of their holdings in investment-grade bonds, except Vanguard High-Yield Bond Fund, which has a majority of assets in below-investment grade bonds. Note: All product data is as of August 31, Vanguard Core Bond Fund Vanguard Core Bond Fund can hold Treasuries, government agencies, corporate bonds, structured products, and mortgage-backed securities across the breadth of the yield curve. It may also hold non-benchmark TIPS and have modest exposure to high-yield bonds. VCOBX Expense ratio 0.15% Number of bonds 879 Bloomberg Barclays U.S. Aggregate, Float-Adjusted Index $871.0 million 6.0 years March 28, 2016 March 26, 2016 Portfolio managers: Gregory S. Nassour, CFA, Principal Has advised the fund since 2016 and has worked in investment management since Earned a B.S. from West Chester University and an M.B.A. from Saint Joseph s University. Gemma Wright-Casparius, Principal Has advised the fund since 2016 and has worked in investment management since Earned a B.B.A. and an M.B.A. from Bernard M. Baruch College of The City University of New York. Brian Quigley, CFA Has advised the fund since 2016 and has worked in investment management since Earned a B.S from Lehigh University. 5

8 Vanguard Treasury Funds Vanguard offers three active Treasury products, Vanguard Short-Term Treasury, Vanguard Intermediate-Term Treasury, and Vanguard Long-Term Treasury funds. Admiral Shares ticker VFIRX Short-Term Treasury Fund Bloomberg Barclays 1 5 Year Treasury Index VFIUX Intermediate- Term Treasury Fund Bloomberg Barclays 5 10 Year Treasury Index VUSUX Long-Term Treasury Fund Bloomberg Barclays Long Term Treasury Index Expense ratio 0.10% 0.10% 0.10% $7.8 billion $6.3 billion $3.7 billion Number of bonds Feb. 13, 2001 Oct. 28, 1991 Feb. 12, 2001 Oct. 28, 1991 Feb. 12, 2001 May 19, 1986 Gemma Wright-Casparius, Principal Has advised these funds since 2015 and has worked in investment management since Earned a B.B.A. and an M.B.A. from Bernard M. Baruch College of The City University of New York. Vanguard Short-Term Federal Fund Vanguard Short-Term Federal Fund holds primarily government agency, Treasury, and mortgaged backed securities. VSGDX Bloomberg Barclays 1 5 Year Government Index Expense ratio 0.10% Number of bonds 113 $5.4 billion 2.2 years February 12, 2001 December 31, 1987 Brian Quigley, CFA Has advised this fund since 2015 and has worked in investment management since Earned a B.S. from Lehigh University. 6

9 Vanguard Inflation-Protected Securities Fund Vanguard Inflation Protected Securities Fund holds primarily U.S. Treasury inflation-protected securities and nominal Treasuries. VAIPX Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index Expense ratio 0.10% Number of bonds 39 $27.6 billion 8.1 years June 10, 2005 June 29, 2000 Gemma Wright-Casparius, Principal Has advised this fund since 2011 and has worked in investment management since Earned a B.B.A. and an M.B.A. from Bernard M. Baruch College of The City University of New York. Vanguard Ultra-Short-Term Bond Fund Vanguard Ultra-Short-Term Bond Fund holds Treasuries, agencies, investment-grade credit, short-term reserves, and structured products. VUSFX Bloomberg Barclays U.S. Treasury Bellwethers: 1 Year Index Expense ratio 0.12% Number of bonds 748 $3.2 billion 1.0 years February 24, 2015 February 24, 2015 Vanguard Short-Term Investment-Grade Fund Portfolio managers: Gregory S. Nassour, CFA, Principal Has advised the fund since 2015 and has worked in investment management since Earned a B.S. from West Chester University and an M.B.A. from Saint Joseph s University. Samuel C. Martinez, CFA Has advised the fund since 2017 and has worked in investment management since Earned a B.S. from Southern Utah University and an M.B.A. from The Wharton School of the University of Pennsylvania. Vanguard Short-Term Investment-Grade Fund seeks current income with limited price volatility. The fund is at least 80% invested in short-term and intermediate-term investment-grade fixed income securities, primarily corporate bonds. VFSUX Expense ratio 0.10% Number of bonds 2,010 Bloomberg Barclays 1 5 Year Credit Index $62.8 billion 2.6 years February 12, 2001 October 29, 1982 Gregory S. Nassour, CFA, Principal Has advised the fund since 2008 and has worked in investment management since Earned a B.S. from West Chester University and an M.B.A. from Saint Joseph s University. 7

10 Vanguard Intermediate-Term Investment-Grade Fund Vanguard Intermediate-Term Investment-Grade Fund seeks moderate and sustainable current income and invests primarily in high-quality corporate bonds. VFIDX Expense ratio 0.10% Number of bonds 2,015 Bloomberg Barclays 5 10 Year Credit Index $28.8 billion 5.5 years February 12, 2001 November 1, 1993 Gregory S. Nassour, CFA, Principal Has advised the fund since 2008 and has worked in investment management since Earned a B.S. from West Chester University and an M.B.A. from Saint Joseph s University. Wellington-managed funds Wellington Management Company llp is among the nation s oldest and most respected institutional investment managers. Wellington manages or co-manages three of Vanguard s taxable bond funds. In doing so, the firm considers secular and economic trends, relative value to target sector weightings, and duration posture. Credit research is the primary source of value, and duration and yield-curve management are secondary. Risk control is also critical to the process. Vanguard Long-Term Investment-Grade Fund Vanguard Long-Term Investment-Grade Fund is managed jointly by Wellington, which oversees 90% of the fund, and Vanguard, which oversees 10%. The fund seeks to provide a high and sustainable level of current income by investing in long-term, high-quality bonds with moderate credit risk. At least 80% of holdings are intermediate- or long-term investment-grade securities. VWETX Bloomberg Barclays U.S. Long Credit A/Better Index Expense ratio 0.11% Number of bonds 787 $15.9 billion 13.5 years February 12, 2001 July 9, 1973 Scott I. St. John, CFA, Senior Managing Director Has advised the fund since 2014 and has worked in investment management since Earned a B.S. from Cornell University and an M.B.A. from University of Rochester. Vanguard portfolio manager: Gregory S. Nassour, CFA, Principal Has advised the fund since 2013 and has worked in investment management since Earned a B.S. from West Chester University and an M.B.A. from Saint Joseph s University. 8

11 Vanguard GNMA Fund Vanguard GNMA Fund typically holds over 15,000 individual mortgage pools. Wellington positions the portfolio using its sophisticated custom analytics to establish lower prepayment risk, lower extension risk, and similar interest-rate risk relative to the benchmark. VFIJX Expense ratio 0.11% Number of bonds 43 Bloomberg Barclays U.S. GNMA Index $25.1 billion 3.8 years February 12, 2001 June 27, 1980 Michael F. Garrett, Senior Managing Director Has advised the fund since 2006 and has worked in investment management since Earned a B.A. from Yale University. Vanguard High-Yield Corporate Fund Vanguard High-Yield Corporate Fund favors higher-quality, high-yield issues. Vanguard and Wellington believe that many lower-rated bonds don t provide sufficient additional compensation for the amount of added risk. We conduct extensive fundamental research to identify stable and improving credits of the issuers in which we invest. VWEAX Expense ratio 0.13% Number of bonds 524 High-Yield Corporate Composite Index* $24.4 billion 4.1 years November 12, 2001 December 27, 1978 Michael L. Hong, CFA, Managing Director Has advised the fund since 2008 and has worked in investment management since Earned an A.B. from Harvard University. * Consists of 95% Bloomberg Barclays U.S. High-Yield Ba/B, 2% Issuer Capped Index, and 5% Bloomberg Barclays U.S. 1 5 Year Treasury Bond Index. Figures do not sum to 100% due to rounding. 9

12 Vanguard Financial Advisor Services P.O. Box 2900 Valley Forge, PA Connect with Vanguard > advisors.vanguard.com > For more information about Vanguard funds and Vanguard ETFs, visit our website or call 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. Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling. All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns. Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer s ability to make such payments will cause the price of that bond to decline. 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 CFA Institute The Vanguard Group, Inc. All rights reserved. U.S. Patent Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623. Vanguard Marketing Corporation, Distributor. FOR FINANCIAL ADVISORS ONLY. NOT FOR PUBLIC DISTRIBUTION. FASFIGAT