Fund managers cautiously optimistic after robust 2013
March 21, 2014
A roundup of the latest Vanguard mutual fund reports
Note: To view the reports mentioned in this article, you'll need to have Adobe Reader installed on your computer.
Coming on the heels of exceptional stock market returns in 2013, many equity managers are more cautious in their outlook for 2014. So, too, are bond managers, as the Federal Reserve is in the early stages of scaling back its massive bond-buying program.
A common theme: Cautious optimism
Tempered optimism was a common theme in the most recently published Vanguard fund reports, which cover the 12 months ended January 31, 2014. For bond funds, some of which had negative returns as interest rates rose during 2013, Wellington Management Company, LLP, manager of Vanguard Long-Term Investment Grade Fund, wrote, "We still view the corporate bond market favorably based on strong corporate fundamentals and low default expectations."
The advisor, who also manages Vanguard High-Yield Corporate, and Vanguard GNMA funds, noted that "despite the Fed's tapering, its monetary policy and those of central banks in Europe and Japan remain supportive, providing ample liquidity to the financial system." And as Vanguard has been pointing out for some time, Wellington acknowledged that "the timing, pace, and magnitude of any further upturns in interest rates will determine the performance of fixed income markets in future years and may well contribute to negative total returns."
Sector funds: Opportunity amid disappointment
On the equity side, the 12-month results of Vanguard's three actively managed sector funds diverged notably. Vanguard Health Care Fund returned more than 37%, ahead of the broad U.S. stock market, while Vanguard Energy Fund posted a modest single-digit gain, and Vanguard Precious Metals and Mining Fund returned about –33%.
Funds that focus on a single sector tend to have greater risk. This was discussed in the sector funds' annual reports, which noted that "sector funds can soar one year and plunge the next. This tendency toward volatility can stir up sector fund investors' worst instincts, tempting them to invest during times of strong performance and to bail as prices inevitably fall back to earth."
Rather than bail, however, M&G Investment Management Ltd., advisor to the Precious Metals and Mining Fund since its inception in 1984, saw opportunity. "A perfect storm of prolonged management indiscipline toward capital investment and concerns over future emerging-market growth has wiped huge value from company capitalizations across the industry. However, demand remains strong, as reflected to a degree in the robust nature of commodity prices. Today, valuations have reached the levels they attained during the height of the global financial crisis in 2008. In light of the ongoing thirst for materials, we feel this offers great value."
M&G continued, "Just as important, the marked change in management of these businesses represents a new stage for the industry. As capital expenditure is curtailed and exploration reduced, future supply will become constrained, which should once again elevate prices, improve margins, and generate significant returns. Recent years have been challenging, but we remain confident that our long-term approach of identifying best-in-class assets, retaining exposure to the most favorable commodities, and working with management teams will continue to create significant value for investors."
Bob Auwaerter's retirement marks the end of a remarkable era
Mr. McNabb's recent letters to shareholders of Vanguard bond funds have included a tribute to the 32-year career of Robert F. Auwaerter, principal and head of Vanguard Fixed Income Group, who is retiring in early April.
"Bob, who joined Vanguard in 1981, was a member of the original three-person Fixed Income Group headed by Ian MacKinnon. Over the years, he held various leadership roles in the department, and he eventually succeeded Ian as its head in 2003. He earned a reputation at Vanguard and within the industry as an extremely dedicated, honest, and insightful decision-maker and leader."
The Fixed Income Group that Mr. Auwaerter helped start has grown from total assets of about $1.3 billion to a 120-person group overseeing $750 billion, constituting nearly one-third of Vanguard's assets under management. Mr. McNabb continued, "On behalf of our clients, I thank Bob for more than three decades of exemplary service and wish him the best in his retirement."
The new head of the Fixed Income Group is Gregory Davis, most recently the chief investment officer for Vanguard in the Asia Pacific region and a director of Vanguard Investments Australia. Greg joined Vanguard in 1999 and has also been head of bond indexing and a senior portfolio manager in the Fixed Income Group.
"Greg is an eminently qualified successor with a strong commitment to the Vanguard way of investing," Mr. McNabb explained. "I couldn't be more confident in his ability to lead the Fixed Income Group and its deep and talented team."
Other recently published reports:
- 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 in a declining market.
- Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
- Bonds and bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
- Past performance is no guarantee of future results.