Drawing on experience to weather market turmoil

21 May 2020 | Markets and Economy


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In this short video, Tim Buckley, Vanguard's CEO and John Hollyer, the global head of fixed income, discuss how a disciplined approach to investing helped us through the coronavirus-driven volatility in the bond markets.

Tim Buckley:  John, your fixed income team manages close to $2 trillion of our clients' assets1. Now, you've managed it across a variety of different strategies and different vehicles. You've got active funds and passive funds. You're active in the money markets, in high yield and emerging markets. You've built a team of experts here in the US and across the globe. How do you use that expertise to weather these markets?

John Hollyer: Well, Tim, you hit it. At the core of it is a group of deep and highly experienced professionals. Our portfolio managers and credit researchers have 15 or 20 years' experience on average. They've got a lot of well-earned grey hair, having lived through a number of crises in the past.

Tim: Both you and I could speak to those, right?

John: Yes. But that sort of experience is invaluable when you hit a time like we've recently been through. The other thing we have is a really, really disciplined approach to risk management, which keeps us on track through all different kinds of markets. And finally, our collaborative team approach emphasises having a variety of strategies—literally, not having all our eggs in one basket. And that's the kind of approach that helps us do better in tough times.

If we look at our credit team, last year, particularly in the third and fourth quarter, the economy was quite strong. Markets were more and more optimistic. And the prices of corporate bonds, bonds with credit risk, kept going higher and higher and higher, which is encouraging while you own them, but it reduces the expected return going forward. It reduces the added cushion that they might have if things don't go well.

And the team looked at those conditions, looked at the fact that we were later and later in the economic cycle, and they chose to cut back on credit risk exposure. That reduced the funds' income today, but it created the room to invest more if valuations got more attractive.

Tim: Now, John, let's go back. If I go back to the beginning of the year - with hindsight, it looks like that must have been an easy decision - to be taking risk off the table, and to preserve “dry powder” - the ability to invest while the markets go into a bit of turmoil. But truthfully saying, at the beginning of 2019, no one really knew what was going to happen. So it was uncomfortable for your team to actually be taking a conservative position when the rest of the world was very optimistic about the global outlook.

John: You're absolutely right, Tim. It doesn't feel good to take risk off the table when it continues, month after month, to perform pretty well. But that's where the team's differentiating views really came in. They were looking ahead at the economy. They were using the experience they've gained over time, and essentially forgoing some return today to have the option to buy bonds at much more attractive levels further down the road.


1Source Vanguard. Data as at May 20th, 2020



Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.

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The opinions expressed in this article are those of individual speakers and may not be representative of Vanguard Asset Management, Limited.

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© 2020 Vanguard Investments Switzerland GmbH. All rights reserved.


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