CIO Tim Buckley talks markets, funds
December 12, 2013
Vanguard recently launched the actively managed Vanguard Global Minimum Volatility Fund, which seeks to provide exposure to the global equity markets with lower volatility. Vanguard.com interviewed Vanguard's chief investment officer, Tim Buckley, about the new fund, the current market environment, and other topical investment issues. Mr. Buckley's group oversees approximately $2 trillion in assets across 148 funds.
Should investors be adjusting their portfolios based on record highs in the stock market and fear of rising interest rates?
We typically caution investors about letting the markets dictate their investment decisions. We continue to face some headwinds in the economy, and equity valuations are above their historical means. Furthermore, there is a fear of Federal Reserve tapering and rising rates, so many investors are understandably in a quandary.
Stocks, bonds, and your portfolio: A (re)balancing act
The stock market had a great year in 2013, with both the S&P 500 Index and the Dow Jones Industrial Average up about 30%. This is a good opportunity to take a close look at your portfolio and assess how recent market performance has affected your asset allocation.
When shareholders ask what to do, I always come back to our four principles, which have served investors well regardless of the environment: Know your goals, set your portfolio allocation according to your goals, minimize cost, and have the discipline to rebalance. Simple, easy to follow, and ultimately, we believe, a path to investment success.
With respect to rebalancing, if you haven't looked at your portfolio in the past six months to one year, you are likely off your target asset mix and will most likely need to consider selling stocks and buying bonds. Rebalancing is a simple but sophisticated strategy to ensure that you maintain the discipline to sell stocks when the market is euphoric and keep them during dips. It also keeps the risk in your portfolio somewhat constant.
Vanguard Global Minimum Volatility Fund was introduced today—a new fund with a new strategy for Vanguard. Why launch this fund now, and how is it different from other minimum volatility funds on the market?
First and foremost, Vanguard bases all new fund launches on investor needs and not on the current market environment. We develop new offerings that we believe fit into a long-term portfolio, and that are enduring and low-cost. If a fund can meet those criteria, we will consider launching it. Vanguard has also taken a measured approach to launching funds. It's not about being first, it's about getting it right for investors and their portfolios.
The objective of Vanguard Global Minimum Volatility Fund is to simply give investors global equity exposure with a relatively smoother ride. Other products in this category have been launched with the objective of outperforming the market with lower volatility. While this approach has worked in the past, we do not believe we can predict the same outperformance in the future. In fact, we know that in some periods a lower-volatility strategy will underperform. Over the long term, our aim is to provide less volatility without sacrificing too much return.
Also, unlike other funds on the market, our fund is actively managed. Our Equity Investment Group will use a quantitative process to construct a global equity portfolio with lower expected volatility than its benchmark.
What role can the new fund play in a portfolio?
Our Minimum Volatility Fund is suitable for those investors who desire diversified equity exposure and are willing to sacrifice a bit of annual return for a smoother ride. Clients drawing on their portfolios, like endowments or retirees, are more vulnerable to significant drops in the market because they must redeem to meet their income needs. Redeeming after a market drop locks in the loss and reduces the amount of capital for future growth and compounding. Ideally, our minimum volatility fund will smooth out these valleys and lessen the damage.
For that reason, we have included the fund in our Managed Payout Funds at a 20% allocation. Our Managed Payout Funds seek to provide a steady payout to investors. To achieve that goal, we invest for capital appreciation with an eye toward low volatility. Diversification across multiple asset classes and lowering the volatility in equities help us achieve just that.
I think it is also important to point out that our minimum volatility fund is not a wholesale substitute for a broad-based global equity portfolio, but a complement. To that end, it might replace some of your equity exposure, but we are not proponents of making this fund your sole equity allocation. In addition, the fund is not a substitute for bonds.
Earlier this year, Vanguard closed several funds, announced several upcoming fund mergers, and phased out Signal® Shares. What is the impetus for all of these changes?
There is the saying that pruning makes a tree stronger. We look at every fund in our lineup on a regular basis to objectively assess if the fund still serves the purpose for which it was originally intended. We look at everything from tax efficiency to differentiated performance. When we determine that a fund is no longer serving its intended purpose, or there is fund overlap, or there are better solutions that we think will benefit investors over the long term, we will make changes.
For example, we announced our plan to merge Vanguard Developed Markets Index Fund and Vanguard Tax-Managed International Fund. The two funds utilize the same benchmark and provide investors essentially the same exposure. So simplifying our offering makes sense.
Vanguard clients benefit from the tenure and experience of fund portfolio managers. However, there have been a number of manager retirements this year, including Bob Auwaerter stepping down as head of Vanguard Fixed Income Group in 2014. Are there further changes to come in the management of Vanguard's funds?
I will go back to the proverb well and say that if there is one constant, it is change. Vanguard is successful in dealing with change at the manager level because of the focus and emphasis we place on mentoring and developing our investment professionals. Bob Auwaerter can step down from his post because he has developed a deep bench and he knows Vanguard will not miss a beat. The gift of a talented team is actually the greatest gift that Gus Sauter left me when I took over his role as CIO.
The same thing goes for our external advisors who announced their retirements this year—each feels confident that they have built a strong team to succeed them. We work with every one of our advisors to ensure that there are clear succession plans and capable managers to step up. We have a record of doing a great job at setting up successful teams and successors and we will look to continue that record.
Competitors are getting aggressive in matching or undercutting Vanguard on expenses on select funds. What does Vanguard think about these competitive moves?
Above all, investors are the winners of the cost competition—lower costs increase longer-term gains, and so we welcome it. It is likely a result of what has been called "the Vanguard effect," which refers to other providers slashing expenses as a reaction to Vanguard's low-cost leadership in a particular fund category or a global market.
We have been committed to lowering the cost and complexity of investing for more than 35 years and we will continue to do so across products and services. Recently we transitioned to new benchmark indexes for 22 index funds to lower long-term costs; we reduced expense ratios on The Vanguard 529 College Savings Plan; and we made ultra-low-cost AdmiralTM Shares more broadly available on index funds. This is not a marketing strategy, it is who we are.
The press has focused a great deal of attention on new investment strategies—smart beta, low beta, fundamental indexing. What is Vanguard's view on these new strategies?
Smart beta has become this broad, all-encompassing term—a concept that is misnamed and is misdefined. There are different factors that drive returns—value, momentum, liquidity, and low volatility, to name a few. Smart beta is exposure to one of or a combination of these factors, and it is an active bet against the market. Beta is the market, and these strategies are taking more specific, more concentrated risk. Smart beta should not be confused with indexing.
We also have to be wary of strategies that are based on back-tested data with an expectation of outperforming the market in the future. So it's important for investors to understand what they own and remember that past performance does not drive future returns.
- All investing is subject to risk, including the possible loss of the money you invest.
- Diversification does not ensure a profit or protect against a loss.
- Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
- Global Minimum Volatility Fund is subject to currency hedging risk, which is the chance that currency hedging transactions may not perfectly offset the fund's foreign currency exposures and may eliminate any chance for a fund to benefit from favorable fluctuations in those currencies. The Fund will incur expenses to hedge its currency exposures.
- The Managed Payout Funds are not guaranteed to achieve their investment objectives, are subject to loss, and some of their distributions may be treated in part as a return of capital. The dollar amount of a fund's monthly cash distributions could go up or down substantially from one year to the next and over time. It is also possible for a fund to suffer substantial investment losses and simultaneously experience additional asset reductions as a result of its distributions to shareholders under its managed distribution policy. An investment in a fund could lose money over short, intermediate, or even long periods of time because each fund allocates its assets worldwide across different asset classes and investments with specific risk and return characteristics. Diversification does not necessarily ensure a profit or protect against a loss in a declining market. The funds are proportionately subject to the risks associated with their underlying funds, which may invest in stocks (including stocks issued by REITs), bonds, cash, inflation-linked investments, commodity-linked investments, long/short market neutral investments, and leveraged absolute return investments.
- Please note that the Managed Payout Funds may not be appropriate for all investors. For example, depending on the time horizon, retirement income needs and tax bracket, an investment in a Managed Payout Fund might not be appropriate for younger investors not currently in retirement, in IRAs or other tax-advantaged accounts for those investors under 59½, or for participants in employer-sponsored plans. Investors who hold a Managed Payout Fund within a tax advantaged retirement account should consult their tax advisors to discuss tax consequences that could result if payments are distributed from their core account prior to age 59½ or if they plan to use the Managed Payout Funds, in whole or in part, to meet their required minimum distribution (RMD) obligations. Distributions from the Managed Payout Funds are unlikely to precisely match an investor's IRA RMD obligations. In addition, use of the Managed Payout Funds may be restricted in employer-sponsored plans by the terms of the governing plan documents and/or at the discretion of the plan administrator. Review the information carefully with your financial advisor before deciding whether a Managed Payout Fund is right for you.