Vanguard Launches Emerging Markets Bond Fund
On December 6, Vanguard announced that its actively managed Emerging Markets Bond fund was open to all investors, setting up yet another active vs. passive footrace within its fund ranks.The fund itself actually launched in March 2016 with a sole investor: Vanguard. Since then, it has been running live (but in the shadows). The Malvern fund titan seeded the fund—under Daniel Shaykevich’s management—with $10 million when it left the dock, but did not make it openly available to investors.
It appears the shakedown cruise was a success. Vanguard began prepping the fund for broad consumption several months ago, with an injection of another $8 million in October and then distributing accumulated capital gains last month—essentially clearing the cabin for new investors to board.
This practice, known in industry parlance as “incubating” a fund, is common. Some companies will seed a lot of strategies, quietly sending poor performers to the scrap heap and marketing the best track records to the masses.
Why now? The simple answer seems to be that the fund’s off to a pretty good start. Since its March 10, 2016 inception through November 30, Emerging Markets Bond’s return of 23.0% is at the head of the leaderboard among all Vanguard bond funds, whether active or passive. And it has outpaced its in-house index competitor, Emerging Markets Government Bond Index, which gained 15.0% over the same period (although this is not an apples to apples comparison based on how the funds are invested, which you can read more about below).
Sources: Morningstar, Adviser Investments.
The catch is that only Vanguard itself (or perhaps some preferred client(s)) were around to earn those returns, and what happens from here carries the usual warning that past performance should not be used to predict future results. And we’re also talking about a relatively short period of just 20 months that did not comprise anything close to a full market cycle.
Vanguard describes the fund as broadening its active and global fixed-income lineup, and Shaykevich is supported by an integrated team in the U.S., London and Hong Kong.
Emerging Markets Bond benchmarks against the J.P. Morgan EMBI Global Diversified Index. Shaykevich has a broader investment universe to choose among than the index fund, which is limited to the debt of government and government-owned entities. Of note, unlike the older index fund, he can invest bonds issued by corporations or financial institutions and can buy locally denominated bonds or currency futures contracts. (To reduce risk, the index fund is hedged back to the U.S. dollar, limiting the impact of currency exchange rates on performance.) Despite that flexibility, Shaykevich’s investment strategy—which will invest at least 80% of total assets in fixed-income securities that are tied to emerging markets countries—seeks to have the majority assets denominated in or hedged back to the U.S. dollar.
As a refresher, Vanguard defines “emerging markets countries” as those with less developed economies, and includes most nations with the exception of Australia, Canada, Japan, New Zealand, the U.K., and the U.S., as well as a majority of the countries in the European Union.
The fund is yet another addition to Vanguard’s actively managed fixed-income options, and we see more options as a good thing. And Emerging Markets Bond’s track record (so far) speaks for itself as a likely higher-risk, higher-reward alternative to its index counterpart.
However, due to the fund’s investment universe, which includes companies operating in countries with a higher potential for political or financial instability, we consider it a higher-risk fixed-income investment than high-quality short- to intermediate-term investment-grade bond funds. Interested investors should carefully consider how much of their portfolio they are willing to allocate to a higher-risk fund like this in the hunt for yield or diversification.
Vanguard Emerging Markets Bond opens with a competitive 0.60% expense ratio—its older index-fund stablemate, Emerging Markets Government Bond Index, carries a 0.49% expense ratio and also assesses a 0.75% front-end load on purchases, a feature absent from the active fund. Both require just $3,000 as an initial investment and are considerably cheaper than the 1.11% expense ratio of the average emerging markets bond fund, according to Morningstar.
Fidelity Manager Moves On
As December began, Fidelity announced that fund manager Kathy Buck would be retiring from managing portfolios on March 31, 2018. Subsequently, the Boston fund giant unveiled the following managerial appointments, effective December 1, 2017:Matt Friedman has assumed Buck’s responsibilities covering the consumer discretionary and consumer staples sectors on Fidelity Value. He has been a manager on the fund since May 2010, alongside five others who will remain in their current roles.
Laurie Mundt took on co-managerial duties for the consumer staples segment of Stock Selector Large Cap Value, where she’s overseen assets since March 2011. Mundt will continue working with five co-managers on the fund after Buck departs.
Joel Tillinghast, lead portfolio manager of Low-Priced Stock since its 1989 inception, has assumed responsibility for Buck’s portion of that fund’s assets. Since 2011, Tillinghast has had a team of co-managers overseeing about 5% of the fund’s portfolio.
Buck, a Fidelity veteran who has been with the firm for nearly 17 years, is leaving to pursue other opportunities. All of her current roles were as a co-manager, meaning that there was already a support structure in place on each of the funds she helped run. We don’t believe her departure should be a cause of concern for shareholders in any of the funds impacted.