Bonds usually pay a fixed rate of interest and they can be useful to generate a steady income. They're often viewed as safer than investing in a company’s shares and provide shallower ups and downs compared to investing in the stock market. That’s because they represent a company’s borrowings rather than its potential for profits.
Bonds can play an important part in a diversified portfolio, but a number of risks have built up that investors should be aware of. Low economic growth and interest rates have reduced the income available from bonds (also known as the ‘yield’). It also means the scope for gains is limited and should interest rates rise, for instance to combat a surprise resurgence in inflation, then prices could fall. Investors should not assume that the low volatility of bonds in recent years will continue indefinitely.
The other main risks to bonds are ‘default’, for example if a slowdown in economic growth that makes it harder for companies to pay their debts, and in certain instances an inability to sell at a reasonable price – also known as ‘illiquidity’ risk.
Vanguard Global Credit Bond Fund
There are a huge number of options for investors wishing to invest in bonds and there are many different types of funds available: government, corporate, strategic, emerging markets and high yield. However, for those wanting a straightforward product for broad access to the global corporate bond market we believe Vanguard Global Credit Bond is worth considering.
It seeks to provide a moderate level of income through investing in a diversified portfolio of corporate bonds on a global basis. The focus is predominantly on developed markets and relatively secure investment grade bonds, but with some scope to buy high yield and investment grade emerging market bonds.
The fund was launched in 2017 but forms part of a well-established strategy and draws upon Vanguard’s impressive fixed income capabilities. Although best known for its passive strategies, the US fund group is one of the largest active fixed income managers in the world, running $450bn, and is resourced accordingly. We believe a well-resourced team is essential for this type of strategy, which is hunting for the most compelling ideas across a very large universe. The fund takes the best ideas from Vanguard’s various fixed income teams to create a diverse portfolio designed to add value primarily through stock selection.
The results thus far have been impressive, though it’s a relatively short period and past performance is not a reliable indication of future returns. A combination of strong credit selection and measured portfolio construction has produced attractive returns without excessive risk. Compared to funds in the Sterling Corporate Bond or Sterling Strategic Bond sectors it is has a truly global opportunity set that maximises investment options. Over half is invested in the US for instance, though foreign currency is largely hedged so that investors are not taking significant currency risks (in the sterling - 'GBP' - unit classes).
Another appeal of the fund is its simplicity. There is little exposure to more esoteric areas of the market and unlike many of its competitors it doesn’t take large bets in terms of geography or interest-rate sensitivity (also known as ‘duration’) versus its benchmark, instead seeking outperformance through individual bond selection. This does mean it can carry a high level of interest rate risk, though, and it should be expected to underperform funds with less duration in a rising interest rate environment.
Vanguard are one of the largest active fixed income managers globally and this fund benefits from their impressive fixed income research capabilities across the world. We see this fund as a possible building block for investors who prefer straightforward exposure to the asset class, rather than a strategic, flexible or global bond manager that aims to move around the fixed interest spectrum more aggressively in search of outperformance. With this product, value should be added (or subtracted) on a more incremental basis. It’s also a compelling alternative to the narrower and generally more expensive funds in the Sterling Corporate Bond sector.
The fund’s annual management charge of 0.35% is competitive for the quality of product. While total stated ongoing costs are currently relatively high this is primarily a function of the extent of buying and selling activity (transaction costs) during a period when the fund was being established and growing rapidly in size from a low base. Over time this figure should fall back significantly. We have added the fund to our Direct Investment Service Preferred List, our curated list of preferred investments for new investment across the major sectors.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.