So far, so good? Vanguard Total International Bond

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Leeraar
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So far, so good? Vanguard Total International Bond

Post by Leeraar »

When Vanguard launched their Total International Bond Fund, it was supposed to be a yawner, with its currency hedging, but it also has a higher ER than Vanguard Total Bond Market.

Then, there was some griping about Vanguard putting allocations of Total International Bond in their LifeStrategy Funds. LS are no longer pure implementations of the 3-Fund Portfolio.

A year later, (or, since its inception), it seems that Total International Bond, VTABX, has handily outperformed Total Bond, VBTLX.

What do the pundits and cogniscenti say now? Seriously, any comments will be appreciated.

L.
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Re: So far, so good? Vanguard Total International Bond

Post by asif408 »

Could that outperformance be due to the longer duration and/or lower credit quality of VTABX? If the durations and credit quality were equivalent and it outperformed then I would take notice.
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Re: So far, so good? Vanguard Total International Bond

Post by cfs »

Supply and demand.

Supply and demand, and the demand was created by Vanguard adding the fund to target retirements, life strategy, and to their Vanguard Select Funds. And as I have said since day one, I expect this fund to be the second largest Vanguard bond fund in the not so distant future based on the aggressive marketing and selling by part of Vanguard.

Thanks for reading.
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Re: So far, so good? Vanguard Total International Bond

Post by Leeraar »

asif408 wrote:Could that outperformance be due to the longer duration and/or lower credit quality of VTABX? If the durations and credit quality were equivalent and it outperformed then I would take notice.
On Morningstar today, the one-year returns are

VBTLX 5.78% Total Bond
VTABX 7.42% Total International Bond

L.
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Re: So far, so good? Vanguard Total International Bond

Post by Leeraar »

cfs wrote:Supply and demand.

Supply and demand, and the demand was created by Vanguard adding the fund to target retirements, life strategy, and to their Vanguard Select Funds. And as I have said since day one, I expect this fund to be the second largest Vanguard bond fund in the not so distant future based on the aggressive marketing and selling by part of Vanguard.

Thanks for reading.
VTABX is $26.8 Billion. That amount is not going to move any prices.

L.
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Re: So far, so good? Vanguard Total International Bond

Post by furwut »

Hmmm .. How about 1 year does not a winner make?

In my very limited world knowledge I'd say that the risks of lending ex-US is higher therefore we shouldn't be surprised that it international has outperformed *this year*.
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Re: So far, so good? Vanguard Total International Bond

Post by am »

Good returns do not justify inclusion in a portfolio. There is still no good reason for most investors to include this in their portfolio. See older discussions.
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Re: So far, so good? Vanguard Total International Bond

Post by Phineas J. Whoopee »

Emerging market bond, to use your word, handily beat both. It even beat any possible combination of the two!

Please tell us, right now, today, what their relative performances will be over the next twelve months, not what you think, but true reality, so we can all invest in the one that will do the best, because everybody knows one-year performance of fixed income funds with durations of 5.5 - 6.9 years is the one true metric.

Thanks in advance. :wink:

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Re: So far, so good? Vanguard Total International Bond

Post by 209south »

With respect, the point is not that international outperformed over the past 12 months, the point is that there may, in fact, be reason to consider international bonds as an asset class within a diversified portfolio. There have been many opponents to this strategy, but intellectually I find it difficult to understand why an allocation to the world's biggest asset class is a bad idea...even for a US-based investor like myself! I have 30% of my fixed income allocation in international bonds (Vanguard Total Intl Bond; Vanguard Emerging Mkt Bond; DFA Global Bond) and am very happy for that position. The modestly higher costs are offset by the comfort I feel being exposed to a diversified group of non-US central bankers, understanding that much of my position is 'dollar-hedged.'
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Re: So far, so good? Vanguard Total International Bond

Post by Norris »

And, lest we forget, Vanguard's Portfolio Watch suggests: "Consider: Adding some currency-hedged, foreign bonds could potentially increase your portfolio diversification. An allocation of about 20% of your bonds in a low cost, currency-hedged international bond fund is a reasonable approach to capture the diversification benefits."

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Re: So far, so good? Vanguard Total International Bond

Post by nisiprius »

I think Samuel Lee has it right: Diversification for the Sake of Diversification. I don't like his characterization of them as a "poor investment," there just isn't any particular reason either to have it or not to have it.
209south wrote:...I find it difficult to understand why an allocation to the world's biggest asset class is a bad idea...
It's not a bad idea, it's just not a good enough idea to take action... because the benefits are tenuous, it adds complexity, and it's not cost-free--the cost of hedging is small but it's there. Basically, it's not really clear to me how important it is to "diversify" bonds.

A bond is a specific promise to pay a certain amount of money on a certain date. An investment-grade bond is a very reliable promise to pay a certain amount of money on a certain date. If two people make a very reliable promise to pay me $1,000 on September 15th, 2015, it's the same promise. It doesn't matter if one of them speaks English and the other speaks German. There's no value in diversifying across languages.

Of course, in real life, George is promising to pay me $1,000 and Georg is promising to pay me €772.10 and that complicates things, so we have to pay someone for taking the risk of currency hedging, and Georg's promise is worth slightly less to me than George's. That's just a cost drag. It's not a very big one--if I'm following Vanguard's paper it's in the ballpark of 0.2% to 0.3%, and Vanguard calls it minimal, but it's still a mosquito bite.

On the other hand, in real life, Georg may be paying more than George because the interest rates are higher in his country, and that is diversification. But again these are just bonds, specific promises of pure money--not business participation in diversified businesses. George can't possibly pay much less interest than Georg for very long because money flows across borders, and if George won't pay as much, everyone is going to buy Georg's bonds instead, until George is forced to raise his interest rates, too. THAT is what we are hoping to diversify across, but Vanguard's paper shows data spanning 1985–2013. That period includes numerous changes of Fed policy, periods of U.S. budget deficit and surplus and deficit, a reasonable amount of global turmoil--and the benefits of diversification over that time period were almost comically small. Why would we expect them to be much larger in the future?
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Re: So far, so good? Vanguard Total International Bond

Post by Phineas J. Whoopee »

209south wrote:...There have been many opponents to this strategy, but intellectually I find it difficult to understand why an allocation to the world's biggest asset class is a bad idea...even for a US-based investor like myself!...
Speaking not for all nay-sayers but solely for myself, I've never claimed it's a bad idea for everybody. I've only explained why I choose not to include it.

In my own retirement portfolio, by design, there are two primary functions: return generation; and return preservation. The functions interact with each other, of course. Given that I'm thoroughly based in the US, return preservation is best accomplished with US-based and USD-denominated fixed income. By preservation I mean in real terms, not nominal, so I have a hefty chunk of inflation-linked instruments, including I Bonds. International diversification is important to me, and I'd even like to have some currency effect, which wouldn't be aided by a currency-hedged bond fund. My Total International Stock holdings provide that function, along with contributing to return generation.

YPDMV (Your Portfolio Design May Vary)

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Re: So far, so good? Vanguard Total International Bond

Post by Call_Me_Op »

Leeraar wrote:When Vanguard launched their Total International Bond Fund, it was supposed to be a yawner, with its currency hedging, but it also has a higher ER than Vanguard Total Bond Market.

Then, there was some griping about Vanguard putting allocations of Total International Bond in their LifeStrategy Funds. LS are no longer pure implementations of the 3-Fund Portfolio.

A year later, (or, since its inception), it seems that Total International Bond, VTABX, has handily outperformed Total Bond, VBTLX.

What do the pundits and cogniscenti say now? Seriously, any comments will be appreciated.

L.
I say that what has happened over the past year really says nothing regarding incorporating this fund as part of one's long-term strategy.
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Re: So far, so good? Vanguard Total International Bond

Post by John3754 »

Leeraar wrote:What do the pundits and cogniscenti say now? Seriously, any comments will be appreciated.
Here's my comment: Comparing the performance of these two funds over the past year means absolutely positively nothing, it's not useful or meaningful in any way whatsoever.
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Re: So far, so good? Vanguard Total International Bond

Post by Leeraar »

John3754 wrote:
Leeraar wrote:What do the pundits and cogniscenti say now? Seriously, any comments will be appreciated.
Here's my comment: Comparing the performance of these two funds over the past year means absolutely positively nothing, it's not useful or meaningful in any way whatsoever.
I am simply asking, why has the performance been different? I think that is a valid question.

When TIBF was launched, it was supposed to be no different, or so the authorities on this board said.

I would have the same question if TIBF trailed TBF by 28%, rather than leading it.

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Re: So far, so good? Vanguard Total International Bond

Post by Phineas J. Whoopee »

Leeraar wrote:...
When TIBF was launched, it was supposed to be no different, or so the authorities on this board said.
...
Can you provide a reference to anybody you consider to be an authority on this board saying performance should track closely year by year? All the statements I remember said the expected return, which isn't what you should expect it to return, is likely to be similar, but that the foreign fund would have to have higher expenses over time because currency hedging isn't free.

Do you remember something different, and if so, can you provide the link?

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Re: So far, so good? Vanguard Total International Bond

Post by stlutz »

I am simply asking, why has the performance been different?
Interest rates have dropped quite a bit in other developed countries. For as much as we say there are low rates in the US, our rates are relatively high compared to other countries.
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Re: So far, so good? Vanguard Total International Bond

Post by gabriel1970 »

Can we persuade Vanguard to drop currency hedging?
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Re: So far, so good? Vanguard Total International Bond

Post by Munir »

asif408 wrote:Could that outperformance be due to the longer duration and/or lower credit quality of VTABX? If the durations and credit quality were equivalent and it outperformed then I would take notice.
Agree with asif408. A more accurate comparison, even for such a short meaningless period of time, is between Total International Bond and Intermediate Bond Index where the performance difference is much smaller than with Total Bond Market.
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Re: So far, so good? Vanguard Total International Bond

Post by derosa »

Well i guess we need to wait 20 years or so and see what happens?

In the meantime I will take a piece of the international bond fund.
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Re: So far, so good? Vanguard Total International Bond

Post by Phineas J. Whoopee »

derosa wrote:Well i guess we need to wait 20 years or so and see what happens?
...
Well, no, that wouldn't help. We still wouldn't know what will happen during the next several years after that. Past performance does not guarantee future results, after all.

The OP was asking why people a year ago said expected returns were about the same when it turns out the Total International Bond Index Fund handily outperformed the Total Bond Market Index Fund over the past twelve months, even though s/he didn't mention the Emerging Markets Government Bond Index Fund handily outperformed them both over the same time period.

That isn't a good reason to, or not to, invest. If international bonds make sense for your portfolio then by all means, use them. Nobody can accurately, consistently predict what the future will hold either way.

One-year performance, however, isn't significant when comparing fixed income funds with average durations of 5.5 to 6.9 years.

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Re: So far, so good? Vanguard Total International Bond

Post by sschullo »

Leeraar wrote:When Vanguard launched their Total International Bond Fund, it was supposed to be a yawner, with its currency hedging, but it also has a higher ER than Vanguard Total Bond Market.

Then, there was some griping about Vanguard putting allocations of Total International Bond in their LifeStrategy Funds. LS are no longer pure implementations of the 3-Fund Portfolio.

A year later, (or, since its inception), it seems that Total International Bond, VTABX, has handily outperformed Total Bond, VBTLX.

What do the pundits and cogniscenti say now? Seriously, any comments will be appreciated.

L.
I bought it a year ago, but its not a competition with other bond funds. I own Total Bond too, and I will continue to keep it forever. I may be too diversified now because I experienced the terrible price of being at the other end of the spectrum in the past.
So far in the decade that I have been "over diversified" in bonds and probably stocks too, my portfolio has been holding up with meeting the returns of a 30/70 stock bond split.
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Re: So far, so good? Vanguard Total International Bond

Post by LAlearning »

Do we base all our decisions on single year data?
I know nothing!
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Re: So far, so good? Vanguard Total International Bond

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You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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Re: So far, so good? Vanguard Total International Bond

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.....
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Re: So far, so good? Vanguard Total International Bond

Post by cfs »

Leeraar wrote:Allan Roth's original view:

http://www.cbsnews.com/news/vanguards-n ... ou-invest/

L.
Thank you for the link, good information on the article.

Thanks for reading.
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Re: So far, so good? Vanguard Total International Bond

Post by Kevin M »

If the two bond funds were expected to perform exactly the same over short time periods, there would have been no reason for Vanguard to add the international bond fund to their TR and LS funds. The fact that they performed somewhat differently over a year is evidence that adding the international bond fund does provide some diversification (would have been true if it had underperformed TBM as well).

I personally am not interested in either of these bond funds, and prefer direct CDs, even though they underperformed both bond funds over the last year. Actually I prefer a combination of safer CDs and riskier bond funds. Some of my bond funds returned 13%-17% over the last year, but I'm not going to sell my 2%-3% CDs to buy more of them. If anything, I'll do the opposite.

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Re: So far, so good? Vanguard Total International Bond

Post by Leeraar »

LAlearning wrote:Do we base all our decisions on single year data?
No, I base my decisions on available data.

L.
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Re: So far, so good? Vanguard Total International Bond

Post by 5jay »

It seems to me that some posters are thinking that Vanguard may have lost their moral compass and might be on their way to become just another giant mass marketing machine. I contend that they sincerely believe that holders of the Target Retirement and LifeStrategy Funds will benefit from the decision to add the Total International Bond Fund to the various portfolios. Am I missing something? It would certainly be informative and helpful if more well known posters would weigh in on this issue. I must confess that the following thought has crossed my mind------given the unrest in this world, I am so grateful for the USA and it just might be that Mr. Bogle's idea that most of us indexers need only two funds----Total Stock and Total Bond is in fact a great idea. Thanks for the opportunity to read your thoughts and to add one now and then.
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Re: So far, so good? Vanguard Total International Bond

Post by asif408 »

5jay wrote:It seems to me that some posters are thinking that Vanguard may have lost their moral compass and might be on their way to become just another giant mass marketing machine. I contend that they sincerely believe that holders of the Target Retirement and LifeStrategy Funds will benefit from the decision to add the Total International Bond Fund to the various portfolios. Am I missing something? It would certainly be informative and helpful if more well known posters would weigh in on this issue. I must confess that the following thought has crossed my mind------given the unrest in this world, I am so grateful for the USA and it just might be that Mr. Bogle's idea that most of us indexers need only two funds----Total Stock and Total Bond is in fact a great idea. Thanks for the opportunity to read your thoughts and to add one now and then.
They may sincerely believe it, but their own research doesn't make a compelling case: http://www.vanguard.com/pdf/icrifi.pdf. Based on their research, you would reduce portfolio volatility by 0.0% if you held 30% international stocks and 20% international bonds (as they use in their LS & TR funds) vs. holding no international bonds. And you would only reduce it by 0.2% if you held 30% international stocks and 100% international bonds. That's not surprising, since the same paper showed that most of the volatility in international bonds is due to currency exposure. Since the fund is hedged (for the most part eliminating currency exposure) very little benefit would be expected with respect to volatility. And, as they point out, unhedged international bonds increased portfolio volatility. Now, for return, they didn't say much, so I don't know if the expected return would be greater. But from a volatility perspective I see little benefit, and that seemed to be their main emphasis in the paper.

My take from the paper is that owning hedged international bonds with my current allocation (at least historically) would not have reduced my portfolio volatility at all and increased my expenses slightly. The OP asked why the international bond fund outperformed, and I gave my explanation. Here's a numerical comparison of BNDX (Total International Bond), BND (Total Bond), and BIV (Intermediate Term Bond), by YTD returns, duration, and credit quality:

BNDX
YTD return: 4.28%
Average Duration: 6.9 years
Credit quality:
U.S. Government 0.0%
Aaa 23.7%
Aa 47.6%
A 9.5%
Baa 19.2%
< Baa 0.0%

BND
YTD return: 3.93%
Average Duration: 5.7 years
Credit quality:
U.S. Government 58.9%
Aaa 6.5%
Aa 4.5%
A 14.4%
Baa 15.7%
< Baa 0.0%

BIV
YTD return:4.98%
Average Duration: 6.5 years
Credit quality:
U.S. Government 51.2%
Aaa 2.8%
Aa 5.2%
A 17.7%
Baa 23.1%
< Baa 0.0%

Take a look at the numbers for yourself and decide. It seems pretty apparent to me that the outperformance is mainly a function of increased duration and lower credit quality of BNDX overall in comparison to BND (Bonds 101). BIV, which is closer in duration to BNDX and has a lower overall credit quality than BND, has outperformed BNDX quite handily YTD.

FWIW, I don't think the 20% used in the LS & TR funds will make a huge difference one way or the other. If I had to pick one fund to invest in, the LS & TR funds are still great one fund options. But I hold the funds individually and see little reason to add international bonds to my portfolio.
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Re: So far, so good? Vanguard Total International Bond

Post by 209south »

asif408, is there a reason why you listed US government bonds AHEAD of AAA? For me, as a US based investor looking for diversification, I sleep easier having a portion of my 'safe money' exposed to actual (by S&P standards) AAA rated nations such as Germany, Hong Kong, Singapore, Canada and Australia. I am cheering for US prosperity as the bulk of my portfolio is based here, but I am cognizant that, in fact, there are many nations with stronger credit profiles, and ignoring them seems foolish.
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Re: So far, so good? Vanguard Total International Bond

Post by asif408 »

209south wrote:asif408, is there a reason why you listed US government bonds AHEAD of AAA? For me, as a US based investor looking for diversification, I sleep easier having a portion of my 'safe money' exposed to actual (by S&P standards) AAA rated nations such as Germany, Hong Kong, Singapore, Canada and Australia. I am cheering for US prosperity as the bulk of my portfolio is based here, but I am cognizant that, in fact, there are many nations with stronger credit profiles, and ignoring them seems foolish.
209south,

Just copied it directly from Vanguard, no particular reason. Guess I could have copied from Morningstar, as they list government bonds as AAA.
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Re: So far, so good? Vanguard Total International Bond

Post by 209south »

Ahh, thanks that makes sense - my point is only that if you position US bonds in the (strong) BB category as S&P does, BNDX shows a far stronger credit profile.
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Re: So far, so good? Vanguard Total International Bond

Post by Phineas J. Whoopee »

209south wrote:asif408, is there a reason why you listed US government bonds AHEAD of AAA? For me, as a US based investor looking for diversification, I sleep easier having a portion of my 'safe money' exposed to actual (by S&P standards) AAA rated nations such as Germany, Hong Kong, Singapore, Canada and Australia. I am cheering for US prosperity as the bulk of my portfolio is based here, but I am cognizant that, in fact, there are many nations with stronger credit profiles, and ignoring them seems foolish.
I'm not asif408, but US government bonds are the biggest and deepest fixed income market in the world. They're the least likely to be influenced by idiosyncratic factors.

But, to your point: AAA. First, ratings apply between similar issuers. An AAA rating for a local revenue muni isn't equivalent to one for a transnational corporation.

The United States is rated at the highest level by two out of the three US rating agencies. S&P downgraded the US from AAA to AA+, the smallest possible decrement, and AA+ still indicates an extremely high level of confidence all interest and principal will be paid in full on time. Moody's and Fitch still list the US at the top of their sovereign rating systems.

An AA+ sovereign rating is better than an AAA corporate one, because corporations exist within the authority of sovereigns.

Nobody is saying you shouldn't invest where and in what you like, for any reason you find compelling. Excessive focus on the smallest possible downgrade by one of the three major agencies probably isn't helpful to an individual investor. That's my view, anyhow.

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Re: So far, so good? Vanguard Total International Bond

Post by Phineas J. Whoopee »

Leeraar wrote:Allan Roth's original view:

http://www.cbsnews.com/news/vanguards-n ... ou-invest/

L.
So my decision was to put my toe in the water. Last week, I bought a little VTABX for my own portfolio. I'm not ready to recommend this fund for my clients, as I want to study it a bit longer. This isn't exactly a glowing recommendation, but it's not a thumbs down, either.
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Re: So far, so good? Vanguard Total International Bond

Post by Leeraar »

Phineas J. Whoopee wrote:
Leeraar wrote:Allan Roth's original view:

http://www.cbsnews.com/news/vanguards-n ... ou-invest/

L.
So my decision was to put my toe in the water. Last week, I bought a little VTABX for my own portfolio. I'm not ready to recommend this fund for my clients, as I want to study it a bit longer. This isn't exactly a glowing recommendation, but it's not a thumbs down, either.
PJW
Written over 10 months ago. The point of my OP was simply to ask for updates based on experience since then.

L.
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Re: So far, so good? Vanguard Total International Bond

Post by 209south »

Thanks for the commentary, PJW - I've been on Wall Street for 30 years and have dealt with Moody's, S&P and Fitch dozens of times - know their strengths and weaknesses well, and certainly understand the difference between corporates, sovereigns, etc. My basic points here are (a) I was curious why the US was shown 'ahead of AAA', when it is arguably an inferior credit to many other sovereigns (at least in S&Ps view, and certainly obvious based on credit stats); (b) I understand that a sizable exposure to US treasuries/TIPs is a logical foundation of a fixed income portfolio for most dollar-based investors, and that is the case for me, but (c) I think the hand-wringing and criticism of Vanguard's approach to BNDX, VWOB, etc. is overdone, because while the US may be the world's single-biggest creditor, it still represents a minority of the global fixed income opportunity, and the fact that BNDX and BND have performed so differently over the past year just points to the diversification benefit that is available on a relatively cost-effective basis. To each his own, and I like others would prefer an unhedged exposure to international bonds, but I applaud Vanguard for their efforts and hold ~20% of my fixed income in their international bond funds.
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Re: So far, so good? Vanguard Total International Bond

Post by Phineas J. Whoopee »

Happy we're on the same page, 209south.

Unhedged international bond funds and ETFs are readily available, if they would make more sense for your portfolio.

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Re: So far, so good? Vanguard Total International Bond

Post by Austintatious »

209south wrote:Thanks for the commentary, PJW - I've been on Wall Street for 30 years and have dealt with Moody's, S&P and Fitch dozens of times - know their strengths and weaknesses well, and certainly understand the difference between corporates, sovereigns, etc. My basic points here are (a) I was curious why the US was shown 'ahead of AAA', when it is arguably an inferior credit to many other sovereigns (at least in S&Ps view, and certainly obvious based on credit stats); (b) I understand that a sizable exposure to US treasuries/TIPs is a logical foundation of a fixed income portfolio for most dollar-based investors, and that is the case for me, but (c) I think the hand-wringing and criticism of Vanguard's approach to BNDX, VWOB, etc. is overdone, because while the US may be the world's single-biggest creditor, it still represents a minority of the global fixed income opportunity, and the fact that BNDX and BND have performed so differently over the past year just points to the diversification benefit that is available on a relatively cost-effective basis. To each his own, and I like others would prefer an unhedged exposure to international bonds, but I applaud Vanguard for their efforts and hold ~20% of my fixed income in their international bond funds.
209south, why the preference for unhedged international bonds?
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cfs
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Re: So far, so good? Vanguard Total International Bond

Post by cfs »

The latest from Morningstar

Good article by Christine Benz - 3 Foreign Bond Funds for Conservative Investors, Picks for globalizing a portfolio without adding a lot of volatility.

http://news.morningstar.com/articlenet/ ... ?id=664660

Vanguard Total International Bond is mentioned -- It tracks an index that is capitalization-weighted, meaning that the most heavily indebted issuers--in this case the governments of Japan and several European countries--top the portfolio.

Thanks for reading.
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209south
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Re: So far, so good? Vanguard Total International Bond

Post by 209south »

Good question, Austintatious - I struggle with the hedged/unhedged question, and haven't gone through the mental gymnastics of really understanding the pros and cons...I 'think' I want foreign bond exposure as an additional diversification measure, but I worry that if (say) Canada outperforms the US from a credit perspective the C$ bonds may strengthen but so will the C$ and Vanguard may have hedged away the benefit?? I also own the DFA fund referred to in the Benz article and that is also hedged...I just think I'd like some direct credit exposure to the Swiss franc, the C$ and A$, the Euro etc...
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Re: So far, so good? Vanguard Total International Bond

Post by leonard »

Does outperformance alone vindicate the strategy?

What about differences in risk? diversification impact of a new asset class? duration differences? etc. etc. etc. Outperformance alone doesn't really answer the question.
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Re: So far, so good? Vanguard Total International Bond

Post by 209south »

All addressed above (ratings, duration etc) - I don't see anybody claiming one should invest in BNDX because of higher returns, I think some (including me) are saying 'based on one year's evidence, the performance is sufficiently DIFFERENT from BND that it is reasonable to consider some exposure to capture diversification benefit - the past year happens to have favored BNDX, the next year could be the opposite...so be it...having exposure to both MAY enhance risk-adjusted returns - I also have some exposure to VWOB, which has outperformed both...I think it is interesting that international bonds have outperformed domestic bonds for the past year, while the opposite is certainly true on the equity side...I don't have an explanation for that, nor do I particularly care...I prefer to have the broadest exposure possible and include BNDX and VWOB in my portfolio for that reason
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Re: So far, so good? Vanguard Total International Bond

Post by Kevin M »

209south wrote:<snip>I think it is interesting that international bonds have outperformed domestic bonds for the past year, while the opposite is certainly true on the equity side...I don't have an explanation for that <snip>
The bond part should be fairly straightforward. Other than defaults, the return is purely a function of distributions and change in share price. Change in share price is inversely related to change in yield.

For Total Int. Bond (Admiral), SEC yield and price on 9/5/2013 were 1.75%, $19.57 and on 9/5/2014 (date of OP) were 1.20%, $20.81. So although the fund SEC yield/price relationship isn't as reliable as the YTM/price relationship for a single bond, we can see that SEC yield fell and share price increased, as one would expect.

Average duration of the fund currently is 6.9 years. Assuming it hasn't changed much over the last year (which I don't know is the case), using the duration rule of thumb one would expect a yield change of 1.20% - 1.75% = -0.55% to result in a price change of -6.9 x -0.55% = +3.8%. Actual price change was 20.81/19.57 - 1 = 6.3%, so quite a bit more than using the duration rule of thumb with SEC yield (which shows that the duration rule of thumb doesn't work so well with SEC yield). There were no capital gain distributions, just dividends.

At any rate, with the last distribution yield at 1.18%, it's obvious that most of the one-year return of roughly 7.5% has come from an increase in price (associated with a drop in yield).

By contrast, most recent distribution yield for Total Bond (Admiral) was 2.51% (current SEC yield is 2.07%), so more of TBM's return came from distributions, and obviously US bond prices rose less and yields fell less than the international bonds. Average duration of TBM currently is 5.7 years.

Back to the OP, looking at yields and durations, the international bond fund looks even less attractive than TBM now than it did a year ago. TIBM has less than 60% of the SEC yield, less than 50% of the distribution yield, and 1.2 years greater duration compared to TBM. So last year's TIBM outperformance has tilted the scales more in favor of future longer-term outperformance of TBM.

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Re: So far, so good? Vanguard Total International Bond

Post by 209south »

I agree with Kevin M's insight, including with respect to future expected returns; but just like for equities I won't vary my target allocation based on perception of value at any point in time. Back to the hedging point, I guess my question is if foreign bonds strengthen in credit quality relative to UST, for whatever reason, I would expect the foreign currencies to outperform the $ at the same time...won't the hedging neutralize the benefit of the exposure to the improving credit?'
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Re: So far, so good? Vanguard Total International Bond

Post by ps56k »

I happen to see this tweet from VG - about Intl Bond funds -
https://personal.vanguard.com/us/insigh ... ips-082014

and did some reading about Vanguard Total Intl Bond Fund Index
https://personal.vanguard.com/us/funds/ ... =INT#tab=0

and now going back to visit the various BH forum threads on the topic....
Now sure I want/need to add/change my Vanguard mix from Total Bond, TIPS, LT Corp, & Wellesley
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