Vanguard Adding International Bond Funds

Fidelity’s Musical Chair Managers and Vanguard’s Overseas Additions

Fidelity and Vanguard both went looking for yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. over the past couple of weeks, with Fidelity staying close to home and Vanguard venturing for the first time into foreign bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. markets. The process included management changes as well.

At Fidelity a veteran manager is leaving both Equity-Income and Equity-Income II, which is concurrent to (and perhaps a result of) both funds reemphasizing the income component in their basic mandates. A minor change at International Small Cap was also announced. None of the changes should be of particular concern to current investors, although those who hold the Equity-Income funds may want to review the new objectives to see if the funds still match their investment goals.

Meanwhile, the rising interest in international investments combined with investors’ desire to generate income during a volatile period in the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market has prompted to Vanguard to create two new foreign bond funds to fill a gaping hole in its fund roster while meeting investor demands. Many of Vanguard’s competitors offer foreign bond funds, so it was only a matter of time before the firm stepped into the market.

For more detail on all of these items, please read on.

Fidelity Changes Mandates, Managers at Equity-Income Funds

 
Fidelity has shaken up management at Equity-Income and Equity-Income II, two of its conservative large value funds. In both cases, Stephen Petersen, who managed Equity-Income for more than 18 years and Equity-Income II since 2009, has been replaced.

Effective October 26, a team comprised of James Morrow, Adam Kramer and Ramona Persaud took the reins of the $7.3 billion Equity-Income. Morrow will serve as lead manager, Kramer will manage the fund’s high-yield bond and convertible securities holdings and Persaud will focus on global equitiesThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid.. At Equity-Income II, which has $4.2 billion in assets, veteran manager Scott Offen has assumed management duties.

Of greater importance to current investors–and likely what prompted the leadership change–Fidelity has revamped each fund’s approach to focus more on securities that can deliver higher dividendA cash payment to investors who own stock in the company. yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price.. More emphasis will also be given to each fund’s bond and convertible securities holdings. These adjustments are designed to better meet the changing needs and preferences of aging Baby Boomers, many of whom are seeking funds that can deliver higher income and less volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in.. Under Petersen, both funds tended to stress capital appreciation opportunities over income.

While in the past Equity-Income II was more aggressive than Equity-Income, those roles have now been reversed. Both funds will seek current yields that are approximately 25% to 50% higher than the yield on the S&P 500. However, Equity-Income II will now be more focused on income and will invest fewer assets in foreign securities than Equity-Income.

Equity-Income lead manager James Morrow joined Fidelity as an equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. research analyst in 1999. Like most of Fidelity’s homegrown talent, he earned his stripes by managing several sector funds, including Select Business Services and Outsourcing, Select Electronics, Select Computers, Select IT Services and Select Technology. In 2006, he landed his first diversified fund assignment at Advisor Diversified StockA financial instrument giving the holder a proportion of the ownership and earnings of a company.. Earlier this year, he was named co-manager at Advisor EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Income and VIP Equity-Income.

Adam Kramer began his career at Fidelity in 2000 as a research analyst. He has covered the healthcare, energy, automotive, aerospace/defense and lodging industries, among others. He has managed the convertible securities sub-portfolio for Strategic DividendA cash payment to investors who own stock in the company. and Income since 2007 and a sub-portfolio of preferred stock since 2010. Along with Morrow, he has co-managed Advisor Equity Income Fund and VIP Equity-Income Portfolio since April 2011.

Persaud joined Fidelity in 2003 as a research analyst and managed Fidelity Select Construction and Housing from 2004 until 2006 and Select Banking until 2008.

Equity-Income II manager Scott Offen has been with Fidelity for more than 26 years, having joined the firm in 1985. In addition to previously managing the requisite list of sector funds, he has managed Value Discovery since 2002 and was named manager of Advisor Equity Value in 2006. He has also served as co-manager of Strategic Dividend and Income since 2006 and VIP Value since 2010.

Fidelity Names Price Co-Manager of International Small Cap

Fidelity also made a change at International Small Cap, naming Nicholas Price as co-manager in place of Noriko Takahashi. Price, who will manage the fund’s Japanese holdings, will work alongside co-managers Colin Stone and Dale Nicholls. He will also continue to manage Japan Smaller Companies, which he has led since 2008. Price joined Fidelity as a research analyst in 1993.

Vanguard Broadening Its International BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. Index Lineup

Last February, we speculated that Vanguard was on the verge of introducing some international bond index funds for U.S. investors (the firm already runs several for overseas investors). While it took longer than anticipated, Total International Bond Index and Emerging Markets Government Bond Index will launch in early 2012.

Despite previously-voiced concerns about U.S. investors’ ability to tolerate foreign currency fluctuations, Vanguard recognized that it needed to add some foreign bond offerings to remain competitive. Total International Bond Index will benchmark its performance against the Barclays Global Aggregate ex-USD Float Adjusted Index (Hedged). To help neutralize the impact of currency fluctuations, the fund will use a hedging strategy. Emerging Markets Government Bond Index will use the Barclay’s Emerging Markets Sovereign Index (USD) as its benchmark. This fund will only invest in dollar-denominated emerging market government debt, which eliminates currency riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. (although other types of risk are still present, as you’ll see below).

Of the two funds, the emerging markets bond index offers a greater opportunity to diversify portfolios, but with more potential volatility. The maximum cumulative loss (MCL) we calculated on the benchmark underlying Total International Bond Index, at -6.3% , isn’t much different than Total Bond Market’s -5.8% reading. But the emerging markets index’s MCL of -34.5% puts bond risk in a whole new light.

Gregory Davis, CFA, is the head of Vanguard’s Bond Index Group and will manage Total International Bond Index. Davis has been with Vanguard since 1999, and manages a slew of the firm’s fixed-income index portfolios, including Total Bond Market AnnuityA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death)., the seven bond index funds and exchange-traded fundsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. (ETFs)A type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. introduced in November 2009 and the bond portion of the soon-to-eliminated Asset Allocation fund.

Yan Pu, CFA, who’s been in investment management since 2000 and co-manages two international bond funds for non-U.S. investors with Davis, will manage Emerging Markets Government Bond Index.

Both funds will have initial investment minimums of $3,000 and Vanguard expects to offer lower cost Admiral Shares and ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. Shares for both funds. The funds’ estimated expense ratios are as follows:

In addition, Total International Bond Index will carry a 0.25% front-end load, while Emerging Markets Government Bond Index will charge 0.75% for the purchase of new shares. There will be no loads on the ETF shares.

The new funds are an interesting and, from a market-share standpoint, likely necessary additions to Vanguard’s fund lineup. As we have held international bond funds in some client portfolios in the past and view the global bond market as a growing opportunity for diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not., we’ll be keeping a close eye on these two funds after they debut.

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