A different approach to fixed income
A different approach to fixed income
The fixed income landscape has undergone seismic shifts over the past year.
While investors are approaching the dawn of a future beyond Covid-19—thanks to rapid vaccine development and deployment—markets continue to grapple with the impact of the pandemic. And bond investors face significant challenges: among them, curtailed economic growth; vastly expanded quantitative easing (QE) programmes; the prospect of low or negative interest rates for decades to come; and ballooning government debt.
Amid these uncertainties, what does this mean for fixed income assets? Is it time for investors to rethink their approach to bond investing?
Adding value for bond investors
While we do expect a rebound in corporate fundamentals this year as the economy recovers, the recovery is likely to be uneven and will drive differentiation between issuers. Here, our approach to active fixed income investing can add value for investors. With little room for error priced into credit bonds, a considered approach to security selection—rather than broad directional calls on credit—is more important than ever in the active global credit sphere. And combining active global credit with government bonds or a global bond index solution can offer complete core bond exposure in a portfolio.
In emerging market bonds, with debt restructurings on the rise, some investors harbour concerns over the sustainability of sovereign debt across some developing countries. But the prospect of restructuring presents an opportunity as well as a threat. Managed in the right way, with rigorous fundamental analysis and a robust risk-focused investment process, investments across emerging market sovereigns can make a meaningful positive return and income contribution to investor portfolios.
As QE programmes consume an increasing part of the global bond universe, Vanguard’s fixed income index funds more accurately represent bond investors’ opportunity set by tracking float-adjusted bond indices. And amid heightened volatility, our bond index funds and ETFs have consistently preserved shareholder value while tracking indices tightly, integrating our active credit research capabilities into index fund management and offering a diversified approach to fixed income indexing while managing liquidity and downside risk.
A longer-term perspective
As fixed income investors navigate these challenges, Vanguard’s approach to active and index fixed income funds remains uncompromising. Everything we do is about creating consistency for investors, be it tracking an index or delivering long-term alpha.
Whether investors seek exposure to a broad market or more narrow segments of the fixed income universe, the teams managing our bond funds haven’t deviated from their collaborative, risk-controlled approach, and they have no plans to.
Furthermore, thinking about active and index fixed income is not necessarily an either/or decision. Investors can benefit from taking a holistic approach to fixed income, by exploring combining active and index bond strategies in portfolios and considering the risk and return tradeoffs across different strategy blends.
Vanguard has been serving fixed income investors through many market cycles – we take a longer-term perspective. We are fixed income pioneers. We established the first retail bond index fund in the United States in 1986, and we are one of the largest active bond fund managers in the world.
Find out how Vanguard’s fixed income solutions can help your clients meet their goals.
Emerging Markets Bond Fund
The Fund seeks to provide total return while generating a moderate level of income by investing primarily in bonds of issuers in emerging market countries. The Fund employs an “active management” strategy, and while the Fund will invest in components of the J.P. Morgan EMBI Global Diversified Index (the “Index”), its investment manager will follow distinct approaches in managing the Fund’s assets.
Global Credit Bond Fund
The Fund seeks to provide a moderate and sustainable level of current income by investing in a diversified portfolio of global credit bonds. The Fund employs an “active management” strategy, and while the Fund will invest substantially in components of the Bloomberg Barclays Global Aggregate Credit Index, its investment manager will follow distinct approaches in managing the Fund’s assets.
Global Bond Index Fund
The Fund employs a passive management – or indexing – investment approach and seeks to track the performance of the Bloomberg Barclays Global Aggregate Float Adjusted and Scaled Index (the “Index”). The Index includes investment-grade and government bonds from around the world with maturities greater than one year. The Index is a market-weighted index of global government, government-related agencies, corporate and securitised fixed income investments with maturities greater than one year.
Global Aggregate Bond UCITS ETF
The Fund employs a passive management – or indexing – investment approach, through physical acquisition of securities, and seeks to track the performance of the Bloomberg Barclays Global Aggregate Float Adjusted and Scaled Index (the “Index”). The Fund invests in a representative sample of bonds included in the Index in order to closely match the Index’s capital and income return. The Index includes investment-grade and government bonds from around the world with maturities greater than one year.
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.
Some funds invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall.
Investments in smaller companies may be more volatile than investments in well-established blue chip companies.
Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.
ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid- offer spread which should be considered fully before investing.
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.
The Vanguard Emerging Markets Bond Fund and Vanguard Global Credit Bond Fund may use derivatives, including for investment purposes, in order to reduce risk or cost and/or generate extra income or growth. For all other funds they will be used to reduce risk or cost and/or generate extra income or growth. The use of derivatives could increase or reduce exposure to underlying assets and result in greater fluctuations of the Funds net asset value. A derivative is a financial contract whose value is based on the value of a financial asset (such as a share, bond, or currency) or a market index.
Some funds invest in securities which are denominated in different currencies. Movements in currency exchange rates can affect the return of investments.
For further information on risks please see the “Risk Factors” section of the prospectus on our website at https://global.vanguard.com.
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Issued in EEA by Vanguard Group (Ireland) Limited which is regulated in Ireland by the Central Bank of Ireland.
Issued in Switzerland by Vanguard Investments Switzerland GmbH.
Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.
© 2021 Vanguard Group (Ireland) Limited. All rights reserved.
© 2021 Vanguard Investments Switzerland GmbH. All rights reserved.
© 2021 Vanguard Asset Management, Limited. All rights reserved.