The Vanguard Core Bond Fund vs. Total Bond Question..

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midareff
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The Vanguard Core Bond Fund vs. Total Bond Question..

Post by midareff »

I was comparing the two funds and while in some ways they seem similar in others they seem to raise a red flag to me... maybe needlessly?

While statistically they seem similar Core SEC 1.18% Expense .10% Total's SEC 1.17% Expense .05%
Core Duration 6.4 years with Effective Maturity 7.7 years vs. Total's 6.6 Duration and 8.5 Effective maturity...

Close enough I think until I get to 25.8% of Core's bonds are NR (Not Rated) as to Credit Quality. Vanguard's rep says the issuer didn't pay to have the credit quality of the bond rated but since it is an actively managed fund you have to trust the fund managers to evaluate them. I don't know if the reduced overall credit quality (Morningstar Box) of the fund is a by product of bond's with a lower credit quality or a result of the 25.8% which are not rated..... what do you think?
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by nisiprius »

I think: it will be time to bother thinking about this when I read that Vanguard has replaced Total Bond with Core Bond in its Target Retirement and LifeStrategy funds. Until then, Vanguard is not saying "this is the fund to use."

I think: it's no secret that they are taking more risk in this fund, their own web page for VCOR puts it in the mid-range for credit quality versus high for Total Bond. So you should be asking a series of questions: "do I want to take a little more risk? If so, do I want it to be stock risk or bond risk? If bond risk, do I want it to be interest rate risk or credit risk?" If credit risk, then why not just replace a portion of Total Bond with a junk ("high yield") bond fund?

What is the compelling reason for wanting to get your credit risk in the form of a somewhat opaque, fairly new, actively managed bond fund?

What, exactly, are you hoping to achieve? There are dozens of actively managed core bond funds out there that are all a little different from Total Bond, and, when adjusted for risk, in future some will do better than Total Bond and some will do worse. But I think if you actually go to PortfolioVisualizer and enter your actual portfolio, and then try substituting various intermediate-term, investment-grade bond funds in place of Total Bond, you will find that it makes surprisingly little difference in return, and even less in risk-adjusted return... even if you deliberately pick an active fund that you know has been an outperformer. Try it.
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midareff
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by midareff »

Well Nisi... I'm trying to gain a better understanding of "This actively managed fund seeks to provide broadly diversified exposure predominantly to the U.S. investment-grade bond market." quote from the Vanguard description of the fund's objectives. Vanguard can't seem to tell me what 25.8% NR really means other than what I wrote. ... and I don't particularly want to own bonds that are not investment grade, whether due to lack of a rating or because they aren't investment grade. Other than the age old question of where do you want to take your risk.. bond side or equity side, an argument I find as helpful as the concept of adding lower performing assets to increase your diversification, for the sake of increasing your diversification.
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by vineviz »

midareff wrote: Sun Sep 13, 2020 8:16 am I was comparing the two funds and while in some ways they seem similar in others they seem to raise a red flag to me... maybe needlessly?

While statistically they seem similar Core SEC 1.18% Expense .10% Total's SEC 1.17% Expense .05%
Core Duration 6.4 years with Effective Maturity 7.7 years vs. Total's 6.6 Duration and 8.5 Effective maturity...

Close enough I think until I get to 25.8% of Core's bonds are NR (Not Rated) as to Credit Quality. Vanguard's rep says the issuer didn't pay to have the credit quality of the bond rated but since it is an actively managed fund you have to trust the fund managers to evaluate them. I don't know if the reduced overall credit quality (Morningstar Box) of the fund is a by product of bond's with a lower credit quality or a result of the 25.8% which are not rated..... what do you think?

First, let me point out that there is no evidence that actively managed bond funds perform (on average) any better than index funds. The managers of VCORX seem to have added some value this year (probably by rotating from short-term Treasuries into higher yielding corporate bonds during the crisis in March), but I wouldn't expect that to be the normal case.

That said, I wouldn't worry about the NR bonds that VCORX is holding.

A large chunk of them (about 25% of the NR bonds) are agency mortgage-backed securities, which would certainly be rated AAA if they were rated.

The rest of the NR bonds appear to have yields that are consistent with AA or A rated bonds, so I don't see that Core Bond has appreciably more credit risk than Total Bond.
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

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vineviz wrote: Sun Sep 13, 2020 9:54 am The managers of VCORX seem to have added some value this year (probably by rotating from short-term Treasuries into higher yielding corporate bonds during the crisis in March), but I wouldn't expect that to be the normal case.
Don't know about the rotation in March but there is a very large difference in the Treasury/Agency vs. Government Mortgage-Backed with VCORX holding significantly more MBS and less Treasury/Agency. Even without a credit difference the higher amount of MBS with the negative convexity "problem" would be a red flag for me.

(Caveat: I avoid funds with ANY MBS.)
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by MickeyBoy »

A month ago the SEC yields for these two funds were 1.18 vs 1.17. Now they are 0.67 (Core) and 1.19 (TBM.) I find this astonishing. What is going on here? Thanks for all comments.
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by Munir »

Why does M* rate those two funds equally according to the M* face page for each fund as Medium/Medium for Credit Quality /Interest Rate Sensitivity- and the same rating for the Intermediate Bond Index (VBILX)? Also, if stars have any value, VCOBX and VBILX have five stars while VBTLX has four with its lower performance numbers.
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by Northern Flicker »

One fund is actively managed, one is a bond index fund. There really is no more to it than that. You can look at the portfolio of the active fund today, but it could change tomorrow. Being lower cost than most of its competitors, the VG core bond fund would seem to be a good choice for someone who wants an actively managed bond fund.

I've noticed that alot of retirement plan administrators select actively managed diversified bond funds for defined contribution plans like 401Ks, and wonder if Vanguard may have created this fund to compete for this business.

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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

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Northern Flicker wrote: Mon Oct 12, 2020 1:02 pm Morningstar star ratings tell you about the past, not the future.
Just to be picky, I have seen M*'s star rating go down when a seasoned manger leaves. This is not based on past performance but on the unknown "ability" of the new management.
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by grabiner »

Doc wrote: Mon Oct 12, 2020 3:28 pm
Northern Flicker wrote: Mon Oct 12, 2020 1:02 pm Morningstar star ratings tell you about the past, not the future.
Just to be picky, I have seen M*'s star rating go down when a seasoned manger leaves. This is not based on past performance but on the unknown "ability" of the new management.
The star rating is based purely on past performance, so it won't be affected by a manager change; any change is incidental. The medalist rating does usually decline when a manager leaves, as Morningstar has less confidence in how well the fund will be run in the future.
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by nisiprius »

Just speaking personally, if I wanted an actively-managed core bond fund, I would be looking at ones with, say, a 33-year track record and $69 billion in assets, or one with a 23-year history and $89 billion in assets, long before I would be looking at VCORX with a four-year history and less than $0.5 billion in assets.

I get it that Vanguard has been doing active management in most of its bond funds for a long time, but in a fairly conservative way. For example, the difference between Vanguard's actively-managed TIPS fund (VIPSX, blue) and a competitor's TIPS index ETF (TIP, orange) has been:

Source

Image

They say in the VCORX product summary that
the fund seeks to outperform the broad investment-grade market through security selection, sector allocation, and, to a lesser extent, duration decisions
I think this--an explicit goal of beating the market--is something new for Vanguard. Can anyone find other Vanguard bond funds with a similar statement in their product summaries? I see no reason to suppose Vanguard can't do it just as well as its competitors, but I don't think of it as a Vanguard core competency or a typical Vanguard product goal. And their competitors have sure been doing it a lot longer, so we can see with our own eyes how they did during the 2008-2009 and the Bond Massacre of 1994.

Also, of course, if you don't have hard information on the actual managers and have some reason for liking them, I don't know how anyone selects an active fund, though. I decided a long time ago that I don't know how to pick stocks, and I don't know how to pick stock-pickers, either. The same thing applies to bonds.
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by Doc »

grabiner wrote: Tue Oct 13, 2020 1:56 pm
Doc wrote: Mon Oct 12, 2020 3:28 pm
Northern Flicker wrote: Mon Oct 12, 2020 1:02 pm Morningstar star ratings tell you about the past, not the future.
Just to be picky, I have seen M*'s star rating go down when a seasoned manger leaves. This is not based on past performance but on the unknown "ability" of the new management.
The star rating is based purely on past performance, so it won't be affected by a manager change; any change is incidental. The medalist rating does usually decline when a manager leaves, as Morningstar has less confidence in how well the fund will be run in the future.
"Morningstar cuts Pimco fund rating from gold to bronze after Gross exit"

"The action, taken Monday night, came as investors pulled what Morningstar said was “tens of billions of dollars” from Total Return, which caters to large investors such as pension funds."

https://www.latimes.com/business/la-fi- ... story.html SEP. 30, 2014

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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

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nisiprius wrote: Tue Oct 13, 2020 2:13 pm They say in the VCORX product summary that
the fund seeks to outperform the broad investment-grade market through security selection, sector allocation, and, to a lesser extent, duration decisions
I think this--an explicit goal of beating the market--is something new for Vanguard. Can anyone find other Vanguard bond funds with a similar statement in their product summaries?
I believe International Core Stock has the objective of outperforming the market, or at least that was what I recall from when it was first introduced. Last I looked that wasn't working out.
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by nisiprius »

Not picky at all. For years Morningstar published star ratings. They said clearly that they are based on past data, based on an objective and published methodology. Morningstar has been admirably frank in stating and documenting the fact that the star ratings have no persistence. They are IMHO a valid and fair comparison of past performance that avoids the pitfalls of not adjusting for risk and not comparing apples to apples.

Perhaps six or seven years ago, Morningstar introduced subjective "analyst ratings," represented by gold, silver, bronze "medals" as well as "neutral" and "negative" ratings. The methodology is all touchy-feely human stuff--that is, the methodology is about how analysts are polled, consensus determined, rubrics, evaluation of the Five P's--Performance, People, Parent, Pstewardship, and Pexpenses. It is intended to be forward-looking and predictive. These are the ratings that drop when management changes. Just about the time they had enough of a track record on how well these ratings actually predicted performance, they did a total revamp in 2019 and introduced the New! Improved! Enhanced Morningstar Analyst Ratings.
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by nisiprius »

tibbitts wrote: Tue Oct 13, 2020 4:35 pm...I believe International Core Stock has the objective of outperforming the market, or at least that was what I recall from when it was first introduced. Last I looked that wasn't working out...
Not arguing, this is interesting. But at the moment the Product Summary for VWICX is not showing such an objective.
This actively managed fund offers exposure to developed and emerging non-U.S. markets and will be diversified across a range of sectors. The fund’s advisors look to construct a portfolio that blends growth and value styles to serve as a core holding in a globally balanced portfolio. Because it invests in non-U.S stocks, the fund can be more volatile than a U.S. stock fund. Investors seeking a broad actively managed single-fund solution to non-U.S. developed and emerging markets may wish to consider investing in this fund.
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by tibbitts »

nisiprius wrote: Tue Oct 13, 2020 4:41 pm
tibbitts wrote: Tue Oct 13, 2020 4:35 pm...I believe International Core Stock has the objective of outperforming the market, or at least that was what I recall from when it was first introduced. Last I looked that wasn't working out...
Not arguing, this is interesting. But at the moment the Product Summary for VWICX is not showing such an objective.
This actively managed fund offers exposure to developed and emerging non-U.S. markets and will be diversified across a range of sectors. The fund’s advisors look to construct a portfolio that blends growth and value styles to serve as a core holding in a globally balanced portfolio. Because it invests in non-U.S stocks, the fund can be more volatile than a U.S. stock fund. Investors seeking a broad actively managed single-fund solution to non-U.S. developed and emerging markets may wish to consider investing in this fund.
Well, this is the closest I can find in a quick search:

Vanguard International Core Stock Fund is designed to be a core holding, offering an active portfolio of developed and emerging market equities that is designed to outperform across regions, styles, and sectors.

from:

https://pressroom.vanguard.com/news/Pre ... -Fund.html
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Re: The Vanguard Core Bond Fund vs. Total Bond Question..

Post by Doc »

@ nisiprius

Star Rating not equal analysts rating. :oops:

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