Bond and stock fund managers stay positive despite volatility
September 20, 2013
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.
Bond funds, especially those focused on long-term bonds, saw their values decline in the late spring and summer. Financial markets were roiled by the prospect of the Federal Reserve unwinding quantitative easing, its bond-buying stimulus. As a result, bond prices dropped and yields rose.
In the most recently published Vanguard fund reports, which cover the six months ended July 31, 2013, Wellington Management Company, LLP, manager of Vanguard Long-Term Investment-Grade, Vanguard High-Yield Corporate, and Vanguard GNMA Funds, sounded a note of optimism despite the challenges. In its letter to shareholders of our Long-Term Investment-Grade Fund, the advisor pointed to some encouraging signs for the corporate bond market.
"We remain positive about investment-grade corporate bond spreads and maintain a favorable long-term outlook given strong credit fundamentals, supportive supply-and-demand dynamics, and attractive valuations. We expect the U.S. economy to improve during the year ahead."
Wellington also discussed the timing of the Fed's plans.
"We think the Fed's rollback is more likely to be too early rather than too late. But as [the Fed] has stated repeatedly, its timetable will depend on economic data. If the numbers disappoint, the Fed will have to adjust its rhetoric."
Cautious optimism for commodities
The broad U.S. stock market's performance has generally been favorable in 2013, although there have been pockets of weakness among certain sectors of the market. The most troubled spots have included energy and the metals and mining industries, where low commodity prices and weak demand in parts of the world have hampered returns.
M&G Investment Management Ltd., manager of Vanguard Precious Metals and Mining Fund, considered the potential for a more positive future in the highly cyclical industry while acknowledging the recent challenges and hardships.
"There are signs that companies are paring back projects, selling noncore assets, and beginning to value minority shareholders as not just providers of capital, but also as owners of the business. With valuations increasingly pointing toward long-term opportunity, we remain vigilant and ready to benefit from these developments."
Wellington, the lead manager of Vanguard Energy Fund, also offered insight into how lower commodity prices have affected the stocks of energy companies and why there may be reasons for optimism.
"Our long-term outlook remains favorable for the energy sector. However, as we always do, we urge caution regarding the near-term direction of commodity prices and the inherent volatility that accompanies investing in stocks of energy companies. We believe many of these companies have the ability to create value for shareholders absent generally rising commodity prices."
Deference for the future
Clients often ask investment firms to make projections about the economy and the financial markets. It's understandable, but such forecasting must be approached carefully and thoughtfully. Economic and market events can surprise even the most experienced professionals and talented portfolio managers. Vanguard Chairman and CEO Bill McNabb addressed the issue in the conclusion to several letters to shareholders:
"Joe Davis, our chief economist, is fond of saying that we 'treat the future with the deference it deserves.' Each January, our economists publish Vanguard's economic and investment outlook," Mr. McNabb wrote. "In short, our forecasts acknowledge that no one has a crystal ball or can envision every scenario. And that underlines one of our core investment principles: Develop a suitable asset allocation using broadly diversified funds. Having a balanced portfolio can help you get through unforeseen events and achieve your goals—even without a crystal ball."
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.
- 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.