Why is Vanguard Short Term Treasury fund rated BBB credit quality?

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munemaker
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Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by munemaker » Thu Aug 10, 2017 8:14 am

Was looking at VFIRX on Morningstar and was surprised to see Morningstar has it rated "Medium" for credit quality with "Average Credit Quality" stated as BBB.

Since the fund holds almost all US government obligations, mostly Treasury Notes, why would it be rated so low?

I must be missing something obvious.

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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by Doc » Thu Aug 10, 2017 8:24 am

Probably due to cash. Morningstar treats all FI with maturities less than 1 year as cash. And cash has no credit rating. The way M* computes a funds overall credit rating is to weight each position by the probability of default which means a small position with a low or no credit rating can have a significant effect.
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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by lazyday » Thu Aug 10, 2017 8:43 am

http://portfolios.morningstar.com/fund/ ... ture=en-US
Bond Statistics
Average Effective Maturity (Years)* 2.20
Average Credit Quality BBB

Credit Quality
Type % Bonds
AAA 92.69
Not Rated 7.31
With every secondary source of data I've used often enough, I've repeatedly seen misleading info and errors. Including both Morningstar and S&P. If making an important decision, I suggest using two sources. Ideally, one source would be the fund company, such as Vanguard, or for index funds, the index provider. Of course it's easier to properly compare funds across companies by using a secondary source like Morningstar.

https://personal.vanguard.com/us/funds/ ... 0032#tab=2
Distribution by credit quality* (% of fund) as of 06/30/2017
U.S. Government 99.6%

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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by munemaker » Thu Aug 10, 2017 9:24 am

Both good points.

Thanks for the responses.

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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by Doc » Thu Aug 10, 2017 10:44 am

lazyday wrote:With every secondary source of data I've used often enough, I've repeatedly seen misleading info and errors. Including both Morningstar and S&P. If making an important decision, I suggest using two sources. Ideally, one source would be the fund company, such as Vanguard, or for index funds, the index provider. Of course it's easier to properly compare funds across companies by using a secondary source like Morningstar.
Using two sources is in general a bad idea especially if one of the sources is the fund company itself. Every fund company has some flexibility in how they calculate the data. At least using a single source like Morningstar the calculations are consistent for different fund providers. (There is however sometimes a significant time lag between the sources and also the possibility that the fund company doesn't transmit the data in the specified format.)

#cruncher's long running thread on TIPS fund durations is a great example of the need for a single source for data from some entity that does not have any skin in the game.
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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by lazyday » Thu Aug 10, 2017 11:43 am

Doc wrote:Using two sources is in general a bad idea especially if one of the sources is the fund company itself. Every fund company has some flexibility in how they calculate the data. At least using a single source like Morningstar the calculations are consistent for different fund providers.
That's what I meant about properly comparing funds from different providers. Obviously you wouldn't just use the fund companies or index providers, if you're comparing two funds that are both from different companies and from different index providers.

In that case, you could try to use something like Morningstar to compare the funds, and use fund company or index data to check up on Morningstar. If you see that Morningstar says BBB but the fund says AAA, maybe Morningstar is wrong, and you have to look closer.

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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by Doc » Thu Aug 10, 2017 12:24 pm

lazyday wrote:
Doc wrote:Using two sources is in general a bad idea especially if one of the sources is the fund company itself. Every fund company has some flexibility in how they calculate the data. At least using a single source like Morningstar the calculations are consistent for different fund providers.
That's what I meant about properly comparing funds from different providers. Obviously you wouldn't just use the fund companies or index providers, if you're comparing two funds that are both from different companies and from different index providers.

In that case, you could try to use something like Morningstar to compare the funds, and use fund company or index data to check up on Morningstar. If you see that Morningstar says BBB but the fund says AAA, maybe Morningstar is wrong, and you have to look closer.
Under 1 Year 38.7%
https://personal.vanguard.com/us/funds/ ... 0032#tab=2

That's where the problem comes from. The short term assets may be T-bills, or money market funds or derivatives or collateral for lent securities or whatever. Vanguard may think these are AAA and they probably are practically risk free so they include them in the AAA group or just ignore them completely and remove them from their average. But if they don't have a rating agency "score" Morningstar treats them as non-rated and uses their published methodology for calculating the fund average rating just as they do for almost all other fund companies except Pimco. Vanguard uses its own rating system which may not be published and may be different from Schwab's which may be different from Fidelity. Vanguard's bond style box is not the same as Morningstar's.

Remember that the fund companies supply the data to Morningstar so the likelihood of bad data is small. The method of calculation is another matter.
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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by lazyday » Thu Aug 10, 2017 1:14 pm

I guess you could check the latest annual or semiannual report to see details of holdings.

Just from my limited experience, I trust Vanguard's data much more than Morningstar's. I'd be shocked if BBB turned out to be a reasonable rating for this fund.

I do use Morningstar, I just don't like to, at least for data. Sometimes I've learned something from their analysis, mostly for individual stocks back when I was doing my own semi-passive investing.

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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by Doc » Thu Aug 10, 2017 4:03 pm

Morningstar Style Box

This is a proprietary Morningstar data point. The Morningstar Style Box is a nine-square grid that provides a graphical representation of the "investment style" of stocks and mutual funds. For stocks and stock funds, it classifies securities according to market capitalization (the vertical axis) and growth and value factors (the horizontal axis). Fixed income funds are classified according to credit quality (the vertical axis) and sensitivity to changes in interest rates (the horizontal axis).

...


The Fixed-Income Style Box
The model for the fixed income style box is based on the two pillars of fixed-income performance: interest-rate sensitivity and credit quality. As depicted in the image below, the three interest sensitivity groups are limited, moderate and extensive and the three credit quality groups are high, medium and low. These groupings display a portfolio's effective duration and third party credit ratings to provide an overall representation of the fund's risk orientation given the sensitivity to interest rate and credit rating of bonds in the portfolio.
http://www.morningstar.com/InvGlossary/ ... e_box.aspx

The whole description is about 7 pages. Does anyone know how long Vanguard's description of their method is?
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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by grabiner » Thu Aug 10, 2017 10:12 pm

lazyday wrote:http://portfolios.morningstar.com/fund/ ... ture=en-US
Bond Statistics
Average Effective Maturity (Years)* 2.20
Average Credit Quality BBB

Credit Quality
Type % Bonds
AAA 92.69
Not Rated 7.31
Morningstar does not average grades the way they are averaged in school; it averages the default rates on various bond classes, and then converts this back to a grade. (This is the right thing to do; a bond fund holding half AAA-rated top-quality bonds and half CCC-rated likely-to-default bonds is much riskier than a bond fund holding all BBB-rated investment-grade bonds.) Morningstar's explanation However, Morningstar doesn't consider the risk of "not rated" bonds individually; it lumps them all into one class with a high default rate.

Here, it looks like the problem is that Morningstar has treated as unrated some holdings which Vanguard knows are high-quality.
David Grabiner

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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by lazyday » Fri Aug 11, 2017 6:34 am

grabiner wrote:Here, it looks like the problem is that Morningstar has treated as unrated some holdings which Vanguard knows are high-quality.
If Vanguard's website (linked earlier) is correct, then wouldn't this be a failure of Morningstar's process?
Distribution by credit quality* (% of fund) as of 06/30/2017
U.S. Government 99.6%
From the footnote:
U.S. Treasury, U.S. Agency, and U.S. Agency mortgage-backed securities appear under "U.S. Government."

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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by Doc » Fri Aug 11, 2017 6:34 am

Thank you David. That is my understanding also but you did a much better job of expressing it.
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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by Doc » Fri Aug 11, 2017 6:53 am

Lazyday wrote:If Vanguard's website (linked earlier) is correct, then wouldn't this be a failure of Morningstar's process?
Fund companies supply data to Morningstar in some kind of standardized format. That format may be different than the fund uses for itself. You can 't assign "blame" to either party.

If a fund doesn't like Morningstar's procedure which Grabiner described above, the fund company can choose to not supply their data to Morningstar.

See Morningstar's style detail for PTTRX dated as of 3/31/2010.

Also note the footnote.
Credit Quality is calculated only using the long position holdings of the portfolio.
Which can explain part of the Vg issue.
http://portfolios.morningstar.com/fund/ ... ture=en_US
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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by JoMoney » Fri Aug 11, 2017 7:04 am

FWIW, Vanguards ratings aren't their own, but that of major ratings agencies as describe in the annual reports Vanguard files with SEC
Vanguard wrote:Credit-quality ratings are obtained from Barclays and are from
Moody's, Fitch, and S&P. When ratings from all three agencies are
used, the median rating is shown. When ratings from two of the
agencies are used, the lower rating for each issue is shown. "Not
Rated" is used to classify securities for which a rating is not
available. Not rated securities include a fund's investment in
Vanguard Market Liquidity Fund or Vanguard Municipal Cash
Management Fund, each of which invests in high-quality money
market instruments and may serve as a cash management vehicle
for the Vanguard funds, trusts, and accounts. For more information
about these ratings, see the Glossary entry for Credit Quality.

Glossary.
Credit-quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). U.S. Treasury, U.S. Agency, and U.S. Agency mortgage-backed securities appear under “U.S. Government.” Credit-quality ratings are obtained from Moody’s and S&P, and the higher rating for each issue is shown. ”Not Rated” is used to classify securities for which a rating is not available. Not rated securities include a fund’s investment in Vanguard Market Liquidity Fund or Vanguard Municipal Cash Management Fund, each of which invests in high-quality money market instruments and may serve as a cash management vehicle for the Vanguard funds, trusts, and accounts.
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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by Doc » Fri Aug 11, 2017 7:52 am

JoMoney wrote:FWIW, Vanguards ratings aren't their own, but that of major ratings agencies as describe ...

The problem comes from the nonrated securities like MM funds. Vg's MM account may be Treasury MM not Prime MM but M* has to treat it as nonrated because in fact the MM fund itself is not rated. Similar problems arise wth derivatives - there is no rating even if the derivatives deal only with Treasuries.
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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by lazyday » Fri Aug 11, 2017 7:53 am

Doc wrote:You can 't assign "blame" to either party.
OK, that might be true. But if Morningstar shows BBB for this fund, then maybe I should be careful about using Morningstar reports to make decisions.
Also note the footnote.
Credit Quality is calculated only using the long position holdings of the portfolio.
Which can explain part of the Vg issue.
http://portfolios.morningstar.com/fund/ ... ture=en_US
I haven't looked at the annual report, but http://portfolios.morningstar.com/fund/ ... ture=en-US doesn't show any short positions. Am I missing something?

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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by Doc » Fri Aug 11, 2017 8:09 am

lazyday wrote:I haven't looked at the annual report, but http://portfolios.morningstar.com/fund/ ... ture=en-US doesn't show any short positions. Am I missing something?
Vanguard is showing 38.7% under 1 year. It's a 1-5 fund. That screams derivatives to me.
https://personal.vanguard.com/us/funds/ ... =INT#tab=2
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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by Doc » Fri Aug 11, 2017 8:15 am

lazyday wrote:OK, that might be true. But if Morningstar shows BBB for this fund, then maybe I should be careful about using Morningstar reports to make decisions.
Vanguard also uses their own style box methodology not Morningstar's. So what are you going to use to compare a Vg fund to a Schwab or Fidelity fund? I suggest that you use the same metric for all of them. And that would be Morningstar even if you think it has some things you don't like.
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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by rkhusky » Fri Aug 11, 2017 8:31 am

Doc wrote: Vanguard also uses their own style box methodology not Morningstar's. So what are you going to use to compare a Vg fund to a Schwab or Fidelity fund? I suggest that you use the same metric for all of them. And that would be Morningstar even if you think it has some things you don't like.
If Morningstar's methodology is flawed, it makes no sense to use them for any company's funds in that category. If they are labeling safe short term cash or other investments as very risky, then how can you differentiate from a fund that truly has very risky investments?

I personally would not use their average rating and would instead look at the breakdown - with 92%+ in AAA and nothing lower rated, I would conjecture the unrated is also high rated and assign an overall rating of AAA. Morningstar lists 1.2% in bonds from Iraq, Ukraine and Tunisia, with the rest from the US.

For another example, Morningstar has FTSE All World ex-US Small Cap with 6.52% cash and 2.86% in other investments, but Vanguard lists no short-term reserves. Who to believe? I lean towards Vanguard.

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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by grabiner » Fri Aug 11, 2017 10:14 am

Doc wrote:Probably due to cash. Morningstar treats all FI with maturities less than 1 year as cash. And cash has no credit rating. The way M* computes a funds overall credit rating is to weight each position by the probability of default which means a small position with a low or no credit rating can have a significant effect.
I confirmed this from the annual report. The actual reason isn't just that this is cash, but that it is the Vanguard Market Liqudity fund, which is used internally by Vanguard and thus has no need for a rating of its own. The fund is essentially a high-quality money-market fund, but Morningstar's formula knows only that it is unrated and assigns the credit quality for all unrated securities. Other funds might use Treasury bills for their cash, and get the AAA rating from those bills.
rkhusky wrote:I personally would not use their average rating and would instead look at the breakdown - with 92%+ in AAA and nothing lower rated, I would conjecture the unrated is also high rated and assign an overall rating of AAA. Morningstar lists 1.2% in bonds from Iraq, Ukraine and Tunisia, with the rest from the US.
The foreign bonds are from the US Agency for International Development, and are guaranteed by the US government.
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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by Doc » Fri Aug 11, 2017 10:18 am

rkhusky wrote:
Doc wrote: Vanguard also uses their own style box methodology not Morningstar's. So what are you going to use to compare a Vg fund to a Schwab or Fidelity fund? I suggest that you use the same metric for all of them. And that would be Morningstar even if you think it has some things you don't like.
If Morningstar's methodology is flawed, it makes no sense to use them for any company's funds in that category. If they are labeling safe short term cash or other investments as very risky, then how can you differentiate from a fund that truly has very risky investments?

I personally would not use their average rating and would instead look at the breakdown - with 92%+ in AAA and nothing lower rated, I would conjecture the unrated is also high rated and assign an overall rating of AAA. Morningstar lists 1.2% in bonds from Iraq, Ukraine and Tunisia, with the rest from the US.

For another example, Morningstar has FTSE All World ex-US Small Cap with 6.52% cash and 2.86% in other investments, but Vanguard lists no short-term reserves. Who to believe? I lean towards Vanguard.
Why do you say Morningstar's methodology is flawed? It is what it is and it publishes the methodology. The fund companies provide their fund's data to Morningstar in a format specified by Morningstar. That format may not be what the fund uses for its own use. But the fund might change their format or just provide the data in their own format. That's an error on the fund's side.

Case in point the FTSE All World ex-US Small Cap: In Vg semi-annual report it lists 7.2% in "Total Temporary Cash Investments" but it also lists 6.1% in "Other Assets and Liabilities". So what is it's short term reserves? The net amount of 1.1% or only the cash investments of 7.2%. Which number did they give to Morningstar? Are those other assets with the negative amounts short positions? Morningstar only uses the long position of a portfolio.
Vanguard Semi-annual report footnote wrote:The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures
investments, the fund’s effective common stock and temporary cash investment positions represent 99.9% and 6.2%, respectively,
of net assets
https://personal.vanguard.com/funds/rep ... 2210128120 p41

99.9+6.2=106.1 hhmmnn

These are the kind of things that make for discrepancies between Morningstar's presentation and Vanguard's presentation. It does not make either of their presentations "flawed" just different.

"I personally would not use their average rating and would instead look at the breakdown - with 92%+ in AAA and nothing lower rated ..."

Go reread Grabiner's post. There are 8% non-rated securities in that portfolio. Vanguard chooses to ignore them or decide on it's own that they are AAA while Morningstar includes them in its average according to its published methodology. One is a simple average ignoring non-rated securities and the other is a probability of default weighted average that takes account of non-rated securities. If you are comparing funds from a single provider by all means use that funds procedures. But if you are comparing funds from different providers you may be deluding yourself by using each one's own and probably different methodology.
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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by lazyday » Fri Aug 11, 2017 11:26 am

Doc wrote:Vanguard also uses their own style box methodology not Morningstar's. So what are you going to use to compare a Vg fund to a Schwab or Fidelity fund? I suggest that you use the same metric for all of them. And that would be Morningstar even if you think it has some things you don't like.
If comparing funds from Vg and Schwab, and they don't both use the same index company, then yes I would use Morningstar. And if I'm making a big decision, I'll also use another source. I don't trust Morningstar.

Maybe they followed their procedures so in a sense it might not be a mistake, but the result gives the wrong impression. Their process resulted in misleading information.
rkhusky wrote:If they are labeling safe short term cash or other investments as very risky, then how can you differentiate from a fund that truly has very risky investments?
I agree. Using the Morningstar report in this case could lead to making the wrong decision. If you're careful, maybe you would notice from other info on the page that BBB might not be a reasonable rating for the fund. Or you could use a second source to check up on Morningstar.

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Re: Why is VANGUARD SHORT TERM TREASURY fund rated BBB credit quality?

Post by lazyday » Fri Aug 11, 2017 11:34 am

grabiner wrote:The foreign bonds are from the US Agency for International Development, and are guaranteed by the US government.
Thanks, spotted one or two on the institutional page and wondered about it.

https://institutional.vanguard.com/VGAp ... undId=0532

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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by Doc » Fri Aug 11, 2017 11:54 am

lazyday wrote:rkhusky wrote:
If they are labeling safe short term cash or other investments as very risky, then how can you differentiate from a fund that truly has very risky investments?

I agree. Using the Morningstar report in this case could lead to making the wrong decision. If you're careful, maybe you would notice from other info on the page that BBB might not be a reasonable rating for the fund. Or you could use a second source to check up on Morningstar.
What would you guys suggest they do for a fund that has 10% non-rated bonds that were junk? Just ignore them and report that it is AAA fund because the other 90% are US Treasuries?

I don't like the idea that a fund can have non-rated securites and can decide what their credit rating should be on there own. People were effectively doing that in '08 and look where that got us. Morningstar is at least taking a conservative approach which made all of us ask the question.

Which is better given the uncertainty: Not buying a very good fund or buying a bad one if the uncertainty is in the other direction?
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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by lazyday » Fri Aug 11, 2017 12:05 pm

Doc wrote:What would you guys suggest they do for a fund that has 10% non-rated bonds that were junk? Just ignore them and report that it is AAA fund because the other 90% are US Treasuries?
If they know that it's junk, then they could put the proper overall rating in, such as BBB. If they don't know if it's junk or not, then they could put in "Not Rated", maybe with a short explanation.
Which is better given the uncertainty: Not buying a very good fund or buying a bad one if the uncertainty is in the other direction?
But the BBB rating might have led someone to choose a different BBB rated fund that really is a BBB fund.

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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by rkhusky » Fri Aug 11, 2017 12:24 pm

Doc wrote: Why do you say Morningstar's methodology is flawed?
If they are assigning a rating to unknown investments, without at least an asterisk, that is flawed. A better solution would be to provide the average over the rated bonds and the percent of unrated bonds. Another flaw, if true, would be assigning a high risk to any bond under 1 year maturity, even if it has been assigned a higher rating.

I don't know how the interaction between Vanguard and Morningstar works. Does Vanguard provide the bonds that it holds and Morningstar looks up the ratings? Or does Vanguard provide the ratings for each bond that it holds? Or does Vanguard just provide some aggregate number(s) over all bonds?

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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by Doc » Fri Aug 11, 2017 1:18 pm

lazyday wrote:If they know that it's junk, then they could put the proper overall rating in, such as BBB. If they don't know if it's junk or not, then they could put in "Not Rated", maybe with a short explanation.
If by they you mean Morningstar - they don't know if it is junk because it is not rated. It is not Morningstar's job to rate securities. That's the rating agency's job. All Morningstar is doing is applying a weighted average number to data provided by the fund itself.
lazyday wrote:But the BBB rating might have led someone to choose a different BBB rated fund that really is a BBB fund
And if Morningstar showed it as AAA when those non-rated securities were really CCC what then. That's worse.
rkhusky wrote:If they are assigning a rating to unknown investments, without at least an asterisk, that is flawed.
Almost every mutual fund has spare cash parked in some kind of in-house money market account. These MM's are not-rated securities. Almost every single fund would have your asterisk.
Morningstar Style Box wrote:These groupings display a portfolio's effective duration and third party credit ratings to provide an overall representation of the fund's risk orientation given the sensitivity to interest rate and credit rating of bonds in the portfolio.

...

Source of Data
The data which drives the fixed income style box is surveyed from fund companies. Morningstar asks fund companies to send the following information on a monthly or quarterly basis for each of their fixed income or allocation funds.

...

Letter rating data provided to Morningstar in one of the first seven categories (AAA through below
B) only reflects letter ratings assigned by one of the Nationally Recognized Statistical Rating
Organization (NRSRO). So-called internal or manger-derived, alphanumeric credit ratings are not to
be included
in those categories: rather, bonds not rated by an NRSRO are included in the not rated
(NR) category
.
FWIW non-rated securites are given the same weight as Moody's Bw / S&P BB

see: https://corporate.morningstar.com/au/do ... yleBox.pdf
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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by lazyday » Fri Aug 11, 2017 1:55 pm

Doc wrote:If by they you mean Morningstar
Yes, that's what I meant. Vanguard gives some information about the Market Liquidity Fund on its website, not sure how much Morningstar could learn from it or from other sources. https://institutional.vanguard.com/VGAp ... undId=1142

(Doc to rkhusky)
Almost every mutual fund has spare cash parked in some kind of in-house money market account. These MM's are not-rated securities. Almost every single fund would have your asterisk.
I don't know anything about these funds. Is it really possible for money market funds to include enough junk that has a significant default probability in the short time until maturity, so that a fund like ST Treasury could be dragged down to BBB by around 7.5% money market?

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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by rkhusky » Fri Aug 11, 2017 2:57 pm

Doc wrote:
rkhusky wrote:If they are assigning a rating to unknown investments, without at least an asterisk, that is flawed.
Almost every mutual fund has spare cash parked in some kind of in-house money market account. These MM's are not-rated securities. Almost every single fund would have your asterisk.
I think providing the average rating over rated bonds, with an asterisk indicating the percent of unrated bonds, is better than providing misleading information.

It's also interesting that Vanguard lists it's short term muni fund as having 50% in bonds with maturities less than 1 year, but Morningstar lists the fund as having only 11% in cash, even though they state that bonds less than 1 year are considered cash. The average rating for this fund seems reasonable when looking at the rating distribution.

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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by Doc » Fri Aug 11, 2017 4:53 pm

lazyday wrote:Yes, that's what I meant. Vanguard gives some information about the Market Liquidity Fund on its website, not sure how much Morningstar could learn from it or from other sources.
It's not up to Morningstar to convert some funds Market Liquidity Fund to a bond rating equivalent. They just use an average bond credit rating. Morningstar is not in the bond rating business. If you want to see a credit rating on a Market Liquidity Fund you should get the SEC to make some rules and then find some credit rating firm to take on that business. Lot's of luck with that one.
lazyday wrote:I don't know anything about these funds. Is it really possible for money market funds to include enough junk that has a significant default probability in the short time until maturity, so that a fund like ST Treasury could be dragged down to BBB by around 7.5% money market?
No its not very likely. But Schwab got sued and lost big for claiming that their Ultra Short fund had insignificant default probability and indeed it had no defaults until it did.
rkhusky wrote: I think providing the average rating over rated bonds, with an asterisk indicating the percent of unrated bonds, is better than providing misleading information.
Talk to Morningstar. Here's their forum link. http://socialize.morningstar.com/NewSoc ... 00008.aspx
rkhusky wrote:It's also interesting that Vanguard lists it's short term muni fund as having 50% in bonds with maturities less than 1 year, but Morningstar lists the fund as having only 11% in cash, even though they state that bonds less than 1 year are considered cash. The average rating for this fund seems reasonable when looking at the rating distribution.
You get into real problems when you start looking at this type of thing. I don't know anything about muni's so I'll use the short term term Treasury fund VFIRX as an example. From Vanguard's site ...

Average effective maturity: 2.3 years
Under 1 year maturity: 38.7%
5 to 10 years: < 5%
over 10 years: 0.2%

That does not compute. One explanation is that in the 38.7%there are some kind of options that expire in less than 1 year but give term risk exposure in the 2 to 3 year range. I think this is how the AAA gets to be BBB. Those short options are non-rated and get put in as BB by default following Morningstar's published policy.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by grabiner » Sat Aug 12, 2017 8:45 am

Doc wrote:
lazyday wrote:rkhusky wrote:
If they are labeling safe short term cash or other investments as very risky, then how can you differentiate from a fund that truly has very risky investments?

I agree. Using the Morningstar report in this case could lead to making the wrong decision. If you're careful, maybe you would notice from other info on the page that BBB might not be a reasonable rating for the fund. Or you could use a second source to check up on Morningstar.
What would you guys suggest they do for a fund that has 10% non-rated bonds that were junk? Just ignore them and report that it is AAA fund because the other 90% are US Treasuries?
The problem here is an incomplete look-through. When a fund holds another fund, rather than individual securities, it makes sense to look through and use the characteristics of the inner fund as part of the outer fund. Morningstar does this in other situations; Vanguard's Target Retirement funds get a bond grade based on the bond holdings of Total Bond Market and Total International Bond Market.

The reason it does not work here is that Morningstar does not rate Vanguard Market Liquidity Fund, and thus its algorithm cannot look through to the fund's actual holdings.
David Grabiner

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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by rkhusky » Sat Aug 12, 2017 9:57 am

Doc wrote: From Vanguard's site ...

Average effective maturity: 2.3 years
Under 1 year maturity: 38.7%
5 to 10 years: < 5%
over 10 years: 0.2%

That does not compute. One explanation is that in the 38.7%there are some kind of options that expire in less than 1 year but give term risk exposure in the 2 to 3 year range. I think this is how the AAA gets to be BBB. Those short options are non-rated and get put in as BB by default following Morningstar's published policy.
I also see 1-3 years at 39% and 3-5 years at 18%, which makes the 2.3 years reasonable. But the 38.7% doesn't square with Morningstar's 0.36% in cash.

When I look at the holdings, I see a lot of Treasuries and some Mortgage notes, but also some Residual Funding Corp. Principal Strip, Financing Corp., Private Export Funding Corp., and Freddie Mac and Fannie Mae REMICS, which seem reasonable when I Google the terms.

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Re: Why is Vanguard Short Term Treasury fund rated BBB credit quality?

Post by Doc » Sat Aug 12, 2017 10:29 am

rkhusky wrote:
Sat Aug 12, 2017 9:57 am
I also see 1-3 years at 39% and 3-5 years at 18%, which makes the 2.3 years reasonable. But the 38.7% doesn't square with Morningstar's 0.36% in cash.
From the annual report January 31, 2017

Average Effective Maturity: 2.3 years
<1 yr: 9.0%
1-3 years: 63.0%
3-5 years: 25.4%
+ 5 years: 2.6%

Same maturity as the current 6/30/17 data on Vanguard's site but very different short term position.

I give up.

I think Grabiner may have come the closest to nailing the original question.
grabiner wrote:
Sat Aug 12, 2017 8:45 am
The reason it does not work here is that Morningstar does not rate Vanguard Market Liquidity Fund, and thus its algorithm cannot look through to the fund's actual holdings
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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