Behind the scenes: Vanguard Global Balanced Fund
05 October 2017 | Topical insights
Vanguard's long association with Wellington Management Company continued with the 2016 introduction of the Vanguard Global Balanced Fund. In this video, Wellington portfolio managers Nataliya Kofman and Loren Moran discuss their approach and the role the Global Balanced Fund can play for investors.
John Croke (moderator): Hello, my name is John Croke, and with me today are Nataliya Kofman and Loren Moran from Wellington Management Company. Nataliya is the equity portfolio manager and Loren is one of three fixed income portfolio managers. Thank you both for being here today.
Nataliya Kofman (equity portfolio manager, Wellington Management Company): Thank you for having us, John.
Loren Moran (fixed income portfolio manager, Wellington Management Company): Thanks for having us.
John Croke: Let's start with why might it make sense to include a balanced product in a broader portfolio.
Nataliya Kofman: Well, John, global funds offer a single option for investors who are seeking both appreciation of assets that comes from owning stocks and also current income that comes from owning bonds. And global portfolios combine those two – stocks and bonds – in a single portfolio to provide a return profile that can both appreciate over time but also provides downside protection and the investor should experience lower drawdowns during the times of market stress.
Also, because these products are global in nature, we're able to further increase that diversification from just a single country, where an investor might be exposed to either regulatory interest rates or economic trends of a single country, to include a broader opportunity set.
Also, the added component of diversification is the fact that we're able to globally invest, which means we can buy stocks and bonds outside of [the] US. By adding that diversification, we're able to remove the risk of a single country, which means that we are minimising risks of either regulatory risks, interest rates, or economic risks that are resident to each particular country, and diversifying that across the world, really, by investing globally.
Additionally, there is a potential for higher returns by investing in companies outside of [the] US because it's often we observe, even though the financial markets have become more integrated over the years, that there's still dislocations that are short-term in nature that we're able to take advantage of by buying quality companies with those quality characteristics that are underpriced by markets outside of [the] US.
Global balanced funds: Outlook and opportunities
John Croke: So what is the outlook for global balanced from the perspective of Wellington Management Company? Where do you see the opportunities going forward?
Nataliya Kofman: Well, today, we're very excited about opportunities we're finding globally outside of [the] US, especially Europe and Japan are two parts of the world that are undergoing stable economic growth. They are later in an economic cycle than [the] US is so, therefore, the equities of those countries are not as richly valued as equities in [the] US.
And, additionally, in Japan and Europe, we're also finding benefits from structural reforms that have taken place over the last couple years. And those primarily mean labour market reforms. And, in addition, companies are becoming, also, much more serious about prudent capital allocation. And, as you know, dividends and prudent capital allocation are quality characteristics that we seek in this portfolio.
So, currently, Japanese and European equities offer a much better balance of good appreciation of assets because they're undervalued but, also, strong structural tailwinds that are going to help them over the next couple of years with those reforms and better capital allocation.
Now, if we turn our lens back to the US, in the US there's been a trend over the last couple of years where higher growth companies and those that typically do not pay dividends, their equities have been appreciating. And, as a result, we find there's a disconnect in valuation between those higher-growth equities and the rest of the market.
As long-term investors that seek higher-quality companies, we are focused on finding those mispriced opportunities and, currently, there appears to be more of those than in the past, given the market direction over the last couple years.
John Croke: Loren, I'm sure you want to weigh in here. How do you see things shaking out from your seat on the fixed income side?
Loren Moran: Yeah, so from the fixed income perspective, global central bank policy has supported risk assets globally, lowered interest rates, and suppressed volatility. So while improved global growth supports a reduction in central bank balance sheets and a normalisation of interest rates, we think this process will be slow and fairly well contained.
That being said, given the current level of interest rates and tight level of spreads, it's hard to see fixed income returns being more than modest.
Wellington's philosophy on fund management
John Croke: How would you describe the investment philosophy applied to the portfolio? And what are some of the defining characteristics of both the equity and fixed income allocations?
Nataliya Kofman: Well, John, on the equity side, our objective is to do better than the broad global equity markets but outperform those markets with less risk. And we do that by investing in quality companies and by having a long time horizon for owning those companies.
So it's a philosophy we've tested over multiple market cycles and, now we're just applying it globally and expanding our opportunity set. But the philosophy really hasn't changed. Therefore, we're looking for these quality companies when the market underappreciates those characteristics. And we are buying, therefore, companies at a discount.
Our objective is to initially enjoy the benefit as the market begins to appreciate the full value of owning these companies and what it is they do. But, secondly, because we are buying companies that have good cash flow generation and pay dividends, basically the companies that we're able to hold through the market cycle and they become compounders in a portfolio and add return on top of the initial return that we were able to enjoy by buying it cheaply in the first place.
John Croke: And quality – and specifically, quality companies – is a theme that's come up in our conversation today a number of times. What are some characteristics you believe align to quality companies?
Nataliya Kofman: Well, first of all, quality companies are market leaders, and so we seek to identify those market leaders through our fundamental research, and we seek to buy them when they're undervalued by the market.
A big component of quality for us is also cash flow generation. Because we're so focused on current income and dividends, we seek to find companies that have stable cash flow generation and that pay dividends, that have the history of rewarding shareholders through dividends.
Now the cash flow generation of a company changes as it goes through the market and also through investment supply/demand cycles. So we seek to identify those companies and industries that are in a period of change, where the supply/demand [is] in our favour. In other words, the capital has left the industry and the companies are under investing but we believe in the future, because these companies have a future of growth in front of them, that the returns will be better because the industry is able to generate higher returns on a lower base of capital.
John Croke: And on the fixed income side, Loren, how would you describe the philosophy that you apply?
Loren Moran: From a fixed income perspective, we're seeking to provide income, manage liquidity and serve as a diversifier to the equity allocation, preserving capital during the times of equity market stress. We invest primarily in higher-quality segments of the fixed income market. That includes investment-grade credit, governments, and global securitised products.
John Croke: And maybe you could share with us a little bit of the process and the people behind building these fixed income portfolios.
Loren Moran: We combine a top-down approach with bottom-up security selection and embedded risk management.
The team is John Keogh, Mike Stack and myself, and we set the top-down risk posture of the portfolios, duration management, and sector and regional allocations for the fixed income portfolio based on the global macroeconomic environment.
We then employ rigorous fundamental credit analysis aided by our supportive team to identify bonds to purchase for the portfolio. Risk management is a key element of our process and we use pre- and post-trade analysis and stress testing to view the portfolio from various lenses, including liquidity, portfolio risk and then, also, market risk.
We communicate regularly with both equity managers to discuss investment themes while also ensuring that portfolios have adequate liquidity and remain comfortably within the strategic allocation bands.
Wellington's expertise and strategy
John Croke: What do you believe the Wellington Management Company brings to the table when it comes to managing a globally balanced portfolio?
Nataliya Kofman: Well, John, first of all, Wellington has a long history of managing balanced products. So we have a history of managing that product and that also includes the relationship with Vanguard. In addition to that product, we have deep expertise in collaborating across the world, so Wellington is global in its research effort.
I have a team that's based in Boston that's dedicated to me looking at particular stocks. But, in addition to that team, I collaborate closely with 25 investment teams that are spread all around the world that are investing in individual markets. They're a great resource for me for stock ideas to put in a portfolio.
In addition to those analysts that work in other investment teams, we have 50 global industry analysts. And those are experts in their industries and they follow companies very closely. They have long tenure usually following their industries.
All those resources come together to put together research and stocks that we put in the portfolio. And, in addition, we supplement our risk analysis with the help of ESG [environmental, social and governance] analysts and macro analysts that help me go through risks such as environmental, social, corporate risks and identify those companies that are best managed and will be the best candidates for quality portfolio that we seek to build for you.
John Croke: Now, Loren, I'm sure you want to jump in here. What would you add to what Nataliya just shared with us?
Loren Moran: I'd really echo many of Nataliya's comments, and we use many of the same resources that she had highlighted.
But from a fixed income perspective we also have a team of 40 dedicated credit analysts that are doing deep fundamental analysis on the bond issuers and the issuers in their coverage as well as expertise of other portfolio management teams across Wellington who have deep expertise amongst the major sectors within fixed income. More broadly, I would really highlight that the collaboration with our equity colleagues is something that's incredibly unique at Wellington. We host corporate management teams in our office frequently and we attend those meetings together.
In addition, all of our research is shared across the firm. So when we're evaluating a company on the debt side, we have access to our equity teams' views, which really helps us see the whole picture of the risks and opportunities within these companies that we're investing in.
The research advantage is one of the main drivers of our performance, not only in terms of security selection, where it's clearly impactful, but also in terms of evaluating the fixed income landscape more broadly and also identifying key themes to address in our portfolios.
John Croke: Loren, Nataliya, thank you so much for your time today and your insights into the Vanguard Global Balanced Fund. For more information about this fund and others, please visit vanguardinvestor.co.uk. We appreciate you tuning in.
This video is directed at professional investors and should not be distributed to, or relied upon by, retail investors.
This video is designed for use by, and is directed only at, persons resident in the UK.
This video is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.
This video does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this email when making any investment decisions.
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.Some funds invest in securities which are denominated in different currencies. Movements in currency exchange rates can affect the return of investments.
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.
The Authorised Corporate Director for Vanguard Investment Funds ICVC is Vanguard Investments UK, Limited. Vanguard Asset Management, Limited is a distributor of Vanguard Investment Funds ICVC.
For further information on a fund's investment policy, please refer to its Key Investor Information Document ("KIID"). The KIID and the Prospectus for this fund is available in local languages from Vanguard via our website: https://global.vanguard.com/.
Issued by Vanguard Asset Management, Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.