Vanguard Global Corporate Bond Index: March 2024 Update

• Vanguard is a pioneer of passive investing

• This fund provides broad exposure to global corporate bonds

• It’s a simple, low-cost way to track the Bloomberg Global Aggregate Corporate Index (Hedged GBP)

• This fund currently features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Vanguard Global Corporate Bond Index Fund provides exposure to a range of fixed income corporate debt. Its benchmark, the Bloomberg Global Aggregate Corporate Index (Hedged GBP), includes corporate bonds with maturities greater than one year and issued in various currencies from across the globe.

An index tracker fund is one of the simplest ways to invest, and we think this fund could be a low-cost way to add exposure to global corporate bonds to an investment portfolio. It could also help diversify a portfolio focused on other assets, such as shares, or form the starting point for a portfolio of passive funds.

Manager

Vanguard is a pioneer when it comes to passive investing, having created the first retail index fund over 45 years ago. It now runs some of the largest index funds in the world. Given its size, it has a big investment team with the expertise and resources to help its funds track indices and markets as closely as possible, while having scale to keep costs down.

Vanguard funds are run by a large, global team. They’re spread across three investment hubs around the world – the US, UK and Australia. This team-based approach means there’s no named manager on the fund. As a collective team, Vanguard has run this fund for over 6 years.

Vanguard also has a trading analytics team, which is responsible for ensuring the funds buy and sell investments efficiently and at a competitive cost. This involves analysing data from different brokers and banks. Lower costs should help the fund track its benchmark as closely as possible.

Process

This fund aims to track its benchmark, the Bloomberg Global Aggregate Corporate Index (Hedged GBP), which is made up of roughly 16,200 global bonds issued by companies. The fund currently invests in around three quarters of the number of constituents in its benchmark, which is known as partial replication. This helps to keep costs down as the fund doesn’t buy and sell every bond that is added to or removed from the index.

The fund has a bias towards the industrial, financial, and utilities sectors which make up 51.5%, 38.9% and 8.9% of the fund respectively, as of the end of February. These are all investment grade bonds that are deemed to be more likely to pay off their debts than some higher-risk bonds, such as high yield bonds. It mainly invests in the US, which accounts for 57% of the fund, and the rest is invested in countries around the world such as the UK, France and Canada. The fund also invests in higher-risk emerging markets in line with the benchmark.

While the team doesn’t invest in every bond within the benchmark, the fund has tended to track its index closely as the team aims to replicate its broader characteristics. For example, they select bonds that together help the fund to closely match the benchmark’s credit rating or yield to maturity. A bond’s credit rating is an assessment of the ability to pay back its debt, while the yield to maturity is the total expected return if the bond is held until it matures.

Vanguard’s global team provides 24-hour market access and consistent fund and bond price monitoring. The team also has access to local bond traders and these relationships can help the team find bonds at attractive prices.

The team also use currency hedging to convert overseas currency bonds back to Sterling. The prices and income of global bonds can fluctuate alongside foreign currency movements, adding volatility for UK investors. By hedging, investors could experience less extreme price movements over time, which helps smooth returns. This can be achieved by using derivatives which can add risk where used.

Vanguard is more conservative than some other passive fixed income providers. For example, they don’t lend the investments within this fund to other providers in return for a fee, known as securities lending.

As this fund is listed offshore investors are not usually entitled to compensation from the UK Financial Services Compensation Scheme.

Culture

Vanguard is currently the second largest asset manager in the world and runs $8.6trn of assets globally as of March 2024. The group aims to put the client at the forefront of everything it does, which drives its focus on quality, low-cost index products.

Jack Bogle founded Vanguard in 1975 and it’s owned by investors. This allows Vanguard to redirect its profits back to investors in the form of lower fees, instead of paying dividends to external shareholders. Bogle believed in creating products that simply track the performance of a market rather than taking a shot at picking individual stocks which may beat them.

The team running this fund works closely with other fixed income research and risk departments across the business. They have daily and weekly meetings to discuss ongoing strategy which could add good support and challenge on how to run the fund effectively.

ESG Integration

Vanguard is predominantly a passive fund house. While it has offered exclusions-based passive funds for many years, it has lagged peers in offering passive funds that explicitly integrate ESG criteria by tracking indices that tilt towards companies with positive ESG characteristics, and away from those that don’t.

Vanguard’s Investment Stewardship team carries out most of the firm’s voting and engagement activity. Their stewardship activity is grounded in the firm’s four principles of good governance: board composition and effectiveness, oversight of strategy and risk, executive compensation and shareholder rights. The Stewardship team produces frequent insights on their engagement activity at both a corporate and governmental level.

Vanguard courted controversy in 2022 when it left the Net Zero Asset Managers’ Initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. It claimed its decision would improve clarity for investors and allow it to speak independently. We view this as a disappointing backward step, but we’re encouraged that the company will continue to engage with companies on climate-related issues.

The Vanguard Global Corporate Bond Index Fund tracks an index that does not specifically integrate ESG considerations into its process. The fund can therefore invest in bonds issued by companies in any sector.

Cost

The fund has an ongoing annual fund charge of 0.18%. We believe this is reasonable when compared to other global fixed income trackers in the market. Our platform charge of up to 0.45% per annum also applies, except in the HL Junior ISA, where no platform fee applies.

Performance

The fund has done a good job of tracking the Bloomberg Global Aggregate Corporate Index (Hedged GBP) since it launched in 2017. As expected from a tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped to keep performance as close to the index as possible.

Bond markets have performed well since the fund was launched up until 2022. Bonds have faced many headwinds since, such as high inflation and big increases in interest rates, both of which make the future value and income paid by bonds less attractive. These headwinds have negatively impacted performance.

However, over the last 12 months, inflation has fallen more than expected and interest rates have reached what are widely considered to be peak levels. Bond markets have been volatile over the year but the rally at the end of 2023 boosted returns and saved the market from another year of losses. This rally was led by the expectation that interest rate cuts are on the horizon. Over the last year to the end of February, the fund returned 5.87%*.

Bond yields move in the opposite direction to prices. After reaching high levels over the course of the year, that haven’t been seen for over a decade, yields fell sharply when bond markets rallied at the end of 2023. The yield for the Vanguard Global Corporate Bond Index Fund was 3.52% as of the end of February. Yields aren’t guaranteed and shouldn’t be considered a reliable indicator of future income.

The team look to match the characteristics of the fund’s benchmark like for example its duration. Duration measures the sensitivity of bond prices to changes in interest rates. Over the year, the fund’s duration has decreased slightly and its average duration is currently 6 years.

Given Vanguard’s size, experience and expertise, we expect the fund to continue to track the benchmark well in the future, though there are no guarantees. As the currency of overseas bonds is hedged back to sterling, we expect the fund’s performance to be less volatile over time compared to an equivalent unhedged fund.

A glance at the five-year performance table below shows that the fund has seen both positive and negative returns. This reflects the performance of the underlying benchmark, which it follows closely. Remember, past performance isn’t a guide to future returns.