Vanguard To Liquidate Convertible Securities Fund

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MFInvestor
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Vanguard To Liquidate Convertible Securities Fund

Post by MFInvestor » Thu Jan 03, 2019 11:37 am

"Vanguard To Liquidate Convertible Securities Fund"



https://www.prnewswire.com/news-releas ... 72427.html

VALLEY FORGE, Pa., Jan. 3, 2019 /PRNewswire/ -- Vanguard today announced that the $962.5 million Vanguard Convertible Securities Fund has been closed to new investors in advance of a planned liquidation in late March. Shareholders of the fund are being notified and have the opportunity to exchange into another Vanguard fund or redeem shares prior to the liquidation date, at which time the fund's assets will be sold and the proceeds distributed.

After careful review of the fund's investment rationale and client usage, Vanguard determined that investors could achieve similar risk-return exposures and long-term returns by investing in a diversified, balanced portfolio of global stock and bond funds.

Vanguard introduced the fund in 1986, primarily for pension funds, endowments, and corporate and non-profit retirement plans. Despite the fund's capable advisor and prudent approach to managing convertible securities, the fund has not gained broad acceptance among these investors and remains one of the smallest offerings in terms of net assets among Vanguard's stock and balanced offerings.

Beliavsky
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by Beliavsky » Thu Jan 03, 2019 11:59 am

"Vanguard determined that investors could achieve similar risk-return exposures and long-term returns by investing in a diversified, balanced portfolio of global stock and bond funds."

If investors should own the market portfolio, why should convertibles or preferred stocks be excluded from that? I don't see why common stocks and corporate bonds are inherently superior to convertibles or preferred stocks.

Valuethinker
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by Valuethinker » Thu Jan 03, 2019 12:15 pm

Beliavsky wrote:
Thu Jan 03, 2019 11:59 am
"Vanguard determined that investors could achieve similar risk-return exposures and long-term returns by investing in a diversified, balanced portfolio of global stock and bond funds."

If investors should own the market portfolio, why should convertibles or preferred stocks be excluded from that? I don't see why common stocks and corporate bonds are inherently superior to convertibles or preferred stocks.
Vanguard introduced the fund in 1986, primarily for pension funds, endowments, and corporate and non-profit retirement plans. Despite the fund's capable advisor and prudent approach to managing convertible securities, the fund has not gained broad acceptance among these investors and remains one of the smallest offerings in terms of net assets among Vanguard's stock and balanced offerings.
I think that's the nub of it. A low cost manager needs huge scale for its individual product offerings.

The fund never gained traction with its intended institutional audience.

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Eric
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by Eric » Thu Jan 03, 2019 12:21 pm

Beliavsky wrote:
Thu Jan 03, 2019 11:59 am
If investors should own the market portfolio, why should convertibles or preferred stocks be excluded from that? I don't see why common stocks and corporate bonds are inherently superior to convertibles or preferred stocks.
One potential issue with preferred stocks: They provide a tax benefit to corporate investors that is not available to individual investors. The price of these stocks may reflect that benefit. Thus, it may be inadvisable for an individual investor to own preferred stock for the same reason it is inadvisable for a low-tax-bracket investor to own tax-exempt bonds: The investor is paying for the tax benefit in the form of a lower yield, but is not getting that benefit.

ftobin
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by ftobin » Thu Jan 03, 2019 12:22 pm

Beliavsky wrote:
Thu Jan 03, 2019 11:59 am
If investors should own the market portfolio, why should convertibles or preferred stocks be excluded from that? I don't see why common stocks and corporate bonds are inherently superior to convertibles or preferred stocks.
I think you'll see the difficulty once you start trying to put convertibles into "risk on" or "risk off" buckets.

tibbitts
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by tibbitts » Thu Jan 03, 2019 12:25 pm

Eric wrote:
Thu Jan 03, 2019 12:21 pm
Beliavsky wrote:
Thu Jan 03, 2019 11:59 am
If investors should own the market portfolio, why should convertibles or preferred stocks be excluded from that? I don't see why common stocks and corporate bonds are inherently superior to convertibles or preferred stocks.
One potential issue with preferred stocks: They provide a tax benefit to corporate investors that is not available to individual investors. The price of these stocks may reflect that benefit. Thus, it may be inadvisable for an individual investor to own preferred stock for the same reason it is inadvisable for a low-tax-bracket investor to own tax-exempt bonds: The investor is paying for the tax benefit in the form of a lower yield, but is not getting that benefit.
The same argument can be made for investors in no-income-tax states avoiding Treasuries.

alex_686
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by alex_686 » Thu Jan 03, 2019 12:26 pm

Beliavsky wrote:
Thu Jan 03, 2019 11:59 am
If investors should own the market portfolio, why should convertibles or preferred stocks be excluded from that? I don't see why common stocks and corporate bonds are inherently superior to convertibles or preferred stocks.
There have been times when convertible securities have been very profitable. They are Warren Buffet's preferred security when investing in public companies.

However, the past 10 years have been very unkind to convertible securities. Junk bonds have been issued with very low interest rates, very low spreads credit spreads, and "Covenant Lite". As a company, why would I need to juice the yield any by adding a convertible feature?

I am sure that convertible bonds will come back in fashion, but right now there is not much on the sleeves to pick from.

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vineviz
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by vineviz » Thu Jan 03, 2019 12:31 pm

Beliavsky wrote:
Thu Jan 03, 2019 11:59 am
"Vanguard determined that investors could achieve similar risk-return exposures and long-term returns by investing in a diversified, balanced portfolio of global stock and bond funds."

If investors should own the market portfolio, why should convertibles or preferred stocks be excluded from that? I don't see why common stocks and corporate bonds are inherently superior to convertibles or preferred stocks.
Even if the premise were correct (that " investors should own the market portfolio"), it's hard to argue that convertible securities make much difference in such a portfolio at less than 0.40% of the total US stock and bond market.

Plus, there are plenty of other convertible securities funds out there: iShares Convertible Bond ETF (ICVT) and Fidelity Convertible Securities (FCVSX) are both widely available.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

tibbitts
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by tibbitts » Thu Jan 03, 2019 12:34 pm

And a logical replacement for this fund (among Vanguard funds, available in Vanguard mutual fund accounts) would be... ?

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vineviz
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by vineviz » Thu Jan 03, 2019 1:55 pm

tibbitts wrote:
Thu Jan 03, 2019 12:34 pm
And a logical replacement for this fund (among Vanguard funds, available in Vanguard mutual fund accounts) would be... ?
The logical replacement would be no replacement: if you already own both US stocks and US bonds, Vanguard Convertible Securities wasn't really adding anything much to the mix.

If you really wanted to mimic the returns of VCVSX then some combination of a high-yield bond fund and a small/mid cap stock fund would be the best bet.

E.g. Vanguard High-Yield Corporate (VWEHX) and Vanguard Extended Market Index (VEXMX).

https://www.portfoliovisualizer.com/bac ... tion2_1=40
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Vanguard To Liquidate Convertible Securities Fund

Post by ThrustVectoring » Thu Jan 03, 2019 1:58 pm

alex_686 wrote:
Thu Jan 03, 2019 12:26 pm
Beliavsky wrote:
Thu Jan 03, 2019 11:59 am
If investors should own the market portfolio, why should convertibles or preferred stocks be excluded from that? I don't see why common stocks and corporate bonds are inherently superior to convertibles or preferred stocks.
There have been times when convertible securities have been very profitable. They are Warren Buffet's preferred security when investing in public companies.

However, the past 10 years have been very unkind to convertible securities. Junk bonds have been issued with very low interest rates, very low spreads credit spreads, and "Covenant Lite". As a company, why would I need to juice the yield any by adding a convertible feature?

I am sure that convertible bonds will come back in fashion, but right now there is not much on the sleeves to pick from.
On the other hand, Buffet has access to cheap leverage and regularly uses it to spruce up returns. Individual investors tend to not do this, so using lower risk/return assets will simply lower their returns regardless of how attractive they are on a risk-adjusted basis.
Current portfolio: 60% VTI / 40% VXUS

alex_686
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by alex_686 » Thu Jan 03, 2019 2:13 pm

ThrustVectoring wrote:
Thu Jan 03, 2019 1:58 pm
On the other hand, Buffet has access to cheap leverage and regularly uses it to spruce up returns. Individual investors tend to not do this, so using lower risk/return assets will simply lower their returns regardless of how attractive they are on a risk-adjusted basis.
I don't think that has much to do with the question, maybe.

Convertible securities are a heads I win (equity like returns on the upside), tails you lose (safety of bonds on the downside). When a distressed company need a fresh injection of capital, they turn of Buffet as a lender of last resort. As such, he can more or less dictate his terms.

Which takes me to another point. I have a positive view of convertible securities, as I see them as a class different than high yield bonds or small cap stocks. They can be significant safer than either. However, I also think it is a skills based activity based on special situations, which is kind of opposite of Boglehead's philosophy.

Beliavsky
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by Beliavsky » Thu Jan 03, 2019 2:38 pm

alex_686 wrote:
Thu Jan 03, 2019 2:13 pm
ThrustVectoring wrote:
Thu Jan 03, 2019 1:58 pm
On the other hand, Buffet has access to cheap leverage and regularly uses it to spruce up returns. Individual investors tend to not do this, so using lower risk/return assets will simply lower their returns regardless of how attractive they are on a risk-adjusted basis.
I don't think that has much to do with the question, maybe.

Convertible securities are a heads I win (equity like returns on the upside), tails you lose (safety of bonds on the downside).
No, because in the "tails" case when a stock falls, the convertible behaves like risky debt, not like a government bond.

KJVanguard
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by KJVanguard » Thu Jan 03, 2019 3:17 pm

32 years and it only attracted some $900M in assets. Not exactly worth having for a fund giant that lives off of economies of scale where popular funds go up into the hundreds of billions of dollars.

ThrustVectoring
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by ThrustVectoring » Thu Jan 03, 2019 3:22 pm

Beliavsky wrote:
Thu Jan 03, 2019 2:38 pm
alex_686 wrote:
Thu Jan 03, 2019 2:13 pm
ThrustVectoring wrote:
Thu Jan 03, 2019 1:58 pm
On the other hand, Buffet has access to cheap leverage and regularly uses it to spruce up returns. Individual investors tend to not do this, so using lower risk/return assets will simply lower their returns regardless of how attractive they are on a risk-adjusted basis.
I don't think that has much to do with the question, maybe.

Convertible securities are a heads I win (equity like returns on the upside), tails you lose (safety of bonds on the downside).
No, because in the "tails" case when a stock falls, the convertible behaves like risky debt, not like a government bond.
It still has considerable convexity - it's far more sensitive to upside risk than downside.
Current portfolio: 60% VTI / 40% VXUS

Topic Author
MFInvestor
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by MFInvestor » Thu Jan 03, 2019 3:29 pm

Some commentary from Investment News regarding the fund closing:

https://www.investmentnews.com/article ... utual-fund


"Vanguard shutters $1 billion mutual fund
Convertible securities fund to be liquidated because it attracted the wrong kind of investors"

The ongoing evaluation and cleanup of the fund lineup at The Vanguard Group is eliminating another large mutual fund from its big mutual fund complex.
"The fund reached a high-water mark in terms of performance and fund size in 2011," said Vanguard spokeswoman Emily Farrell. The fund's assets peaked in 2011 at $2.2 billion, following a 19.24% gain in 2010 and a 40.81% surge in 2009.

By the end of 2016, when the fund gained 6.62%, its assets had dropped to $1.5 billion.

Ms. Farrell said that the strategy was designed for foundations, endowments, and corporate and nonprofit retirement plans, but the current investor base is primarily made of up retail investors.

Jeff DeMaso, co-editor of The Independent Adviser for Vanguard Investors newsletter, shrugged off the liquidation as the cost of being a mutual fund behemoth.

"A billion-dollar fund would be a huge success at most firms, but with Vanguard's assets, it's just not worth the hassle anymore," he said. "It's partially because Vanguard has become a very large firm, and partially because the fund's assets are going the wrong way."

Beliavsky
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by Beliavsky » Thu Jan 03, 2019 3:34 pm

I have done some optimizations on Portfolio Visualizer to test Vanguard's assertion that VCVSX is redundant. These and other optimizations I have done are in a Morningstar forum thread Optimal fund portfolios using Portfolio Visualizer with links to PV and better formatting.

From Jan 1987 - Dec 2018 VCVSX does get some weight alongside stocks and Treasury bonds in an optimal portfolio:

Maximum Sharpe Ratio

Ticker Name Allocation
VCVSX Vanguard Convertible Securities Inv 8.29%
VUSTX Vanguard Long-Term Treasury Inv 56.68%
VFINX Vanguard 500 Index Investor 35.03%

with CAGR of 8.67% and Sharpe of 0.72.

However, including VWEHX kicks out VCVSX:

Maximum Sharpe Ratio

Ticker Name Allocation
VUSTX Vanguard Long-Term Treasury Inv 41.36%
VFINX Vanguard 500 Index Investor 21.11%
VWEHX Vanguard High-Yield Corporate Inv 37.53%

with CAGR of 8.01% and Sharpe of 0.76.

In the absence of VCVSX investors can consider other convertible bond funds.

From Jan 1988 - Dec 2018 the optimal portfolio was

Ticker Name Allocation
VWEHX Vanguard High-Yield Corporate Inv 25.48%
VUSTX Vanguard Long-Term Treasury Inv 45.35%
VFINX Vanguard 500 Index Investor 11.70%
FCVSX Fidelity Convertible Securities 17.47%

with CAGR of 8.62% and Sharpe of 0.83 when those are the only funds allowed.

So Vanguard is liquidating VCVSX because in this case Fidelity is doing a better job :).

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Re: Vanguard To Liquidate Convertible Securities Fund

Post by Northern Flicker » Thu Jan 03, 2019 3:45 pm

Beliavsky wrote:
Thu Jan 03, 2019 11:59 am
"Vanguard determined that investors could achieve similar risk-return exposures and long-term returns by investing in a diversified, balanced portfolio of global stock and bond funds."

If investors should own the market portfolio, why should convertibles or preferred stocks be excluded from that? I don't see why common stocks and corporate bonds are inherently superior to convertibles or preferred stocks.
Corporations who invest in preferred stock get a tax benefit not available to individual investors and not relevant to many other institutional investors who don’t pay tax. Investors with a tax savings would be willing to pay more for these than those who lack the tax benefit, which pushes yields to a level where investors without a tax benefit probably are not compensated adequately for the risk they take. Most investors are better off leaving preferreds out of their asset allocation as a result.

The highest quality preferred stocks are typically issued by banks, who might hold portfolios of financial preferreds as an alternative to say corporate bonds due to the tax advantages and because in the past they could be used for Tier 1 capital reserves. Dodd-Frank has phased out allowing preferred stock be part of bank Tier 1 capital reserves. This may have had a significant impact on liquidity of financial preferreds, and in turn Vanguard’s ability to manage this fund well.
Taking a break from Bogleheads.

bberris
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by bberris » Thu Jan 03, 2019 5:23 pm

tibbitts wrote:
Thu Jan 03, 2019 12:34 pm
And a logical replacement for this fund (among Vanguard funds, available in Vanguard mutual fund accounts) would be... ?
I'm not sure of a fund, but a convertible bond has two aspects: an ordinary corporate bond, and an option to buy stock of the corporation. So I don't think it is a suitable investment for anyone. The interest rate is lower than market to pay for the option.

Also, note the similarity to the fixed index annuity, if you had an entire portfolio of them.

Walkure
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Vanguard Convertible Securities is CLOSING (VCVSX)

Post by Walkure » Fri Jan 04, 2019 9:41 am

[merged into existing topic - moderator prudent]

Received an email this morning from Vanguard with link to the following announcement:
https://vanguard.com/pdf/wdictar.pdf

My summary of important points:
Due to the pending liquidation, the Fund will be closed to new investors on January 3, 2019 and to additional purchases from existing shareholders on March 6, 2019...
The Fund will commence liquidating its investments on or about January 3, 2019. Once the liquidation process is complete, the Fund will be liquidated. Liquidation means that all remaining Fund assets will be sold and the proceeds distributed to any shareholders remaining in the Fund on the liquidation date, on or around March 19, 2019. At any time before the liquidation, shareholders of the Fund may redeem their shares at the then-current share price...
As the Fund prepares to liquidate, the Fund manager may deviate from its investment objective and strategies, for example repositioning the Fund’s holdings by selling its current positions and replacing them with cash. This strategy is intended to preserve the value of shareholders’ accounts during the liquidation period...
Overall, the trustees believe that shareholders likely would be best served by redirecting their assets to other investments...
Prior to the liquidation date, the Fund will declare and pay its shareholders of record one or more dividends and/or other distributions of its investment company taxable income, if any, and net realized capital gains, if any, for the current taxable year through the liquidation date...
Distribution of liquidation proceeds, if any, to Fund shareholders generally will result in a taxable event for shareholders, depending on their individual circumstances...
Distributions leading up to the liquidation will be paid out or, up until March 6, 2019, reinvested according to your current instructions for the Fund’s regular distributions and should be reflected on your account statement...
If you take no action, your shares will be exchanged for shares of Vanguard Federal Money Market Fund.
Actionably for myself, I intend to exchange all shares before close of markets today for another Vanguard fund. It is in a Roth, so I do not personally have any tax concerns. With the exception of this fund, I am 100% equity, so I need recommendations on what to do with the proceeds. Amazing that out of the eight funds I've ever owned, two have now been ripped out from under me in the past year (first VGPMX, now this.) Guess it serves me right for deviating from the 3-fund orthodoxy :twisted: or alternatively, Vanguard is actually worse at staying the course than I am. :shock:

garlandwhizzer
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by garlandwhizzer » Fri Jan 04, 2019 11:15 am

Vanguard wrote:

"Vanguard determined that investors could achieve similar risk-return exposures and long-term returns by investing in a diversified, balanced portfolio of global stock and bond funds."

I agree with this thinking and I agree with Vangaurd's action to close the fund and suggest a balanced portfolio instead. It seems to me that choosing a mixture of bonds and stocks to match your goals and risk tolerance is preferable. IMO convertible securities are an answer in search of a problem.

Garland Whizzer

bluquark
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by bluquark » Fri Jan 04, 2019 11:41 am

Convertible securities sound like a bet on high volatility. There’s a story for the upside and downside, but they perform worse than high-yield bonds if the company just kind of muddles along. I’m not sure volatility strategies should be part of any passive portfolio.

Beliavsky
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by Beliavsky » Fri Jan 04, 2019 8:49 pm

bluquark wrote:
Fri Jan 04, 2019 11:41 am
Convertible securities sound like a bet on high volatility. There’s a story for the upside and downside, but they perform worse than high-yield bonds if the company just kind of muddles along. I’m not sure volatility strategies should be part of any passive portfolio.
The stock market tends to fall when volatility rises (the correlation of SPX changes and VIX changes is negative), so why wouldn't you want an investment that has positive returns and positive exposure to volatility?

bberris
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by bberris » Sat Jan 05, 2019 3:50 pm

Beliavsky wrote:
Fri Jan 04, 2019 8:49 pm
bluquark wrote:
Fri Jan 04, 2019 11:41 am
Convertible securities sound like a bet on high volatility. There’s a story for the upside and downside, but they perform worse than high-yield bonds if the company just kind of muddles along. I’m not sure volatility strategies should be part of any passive portfolio.
The stock market tends to fall when volatility rises (the correlation of SPX changes and VIX changes is negative), so why wouldn't you want an investment that has positive returns and positive exposure to volatility?
You might want that, but convertible bonds are an awkward way to get it. Better to Just buy bonds and options.

Beliavsky
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Re: Vanguard To Liquidate Convertible Securities Fund

Post by Beliavsky » Thu Jan 10, 2019 11:41 am

Vanguard may not care about a $1 billion fund in a niche asset class as discussed in the article below, but an invidual with $1 million to invest need not restrict himself to a fund or asset class with huge capacity. Fidelity Convertible Securities (FCVSX) has a good track record, and from Jan 1988 to Dec 2018 it had substantial weight in the optimal portfolio:

Maximum Sharpe Ratio
Ticker Name Allocation
VWEHX Vanguard High-Yield Corporate Inv 25.48%
VUSTX Vanguard Long-Term Treasury Inv 45.35%
VFINX Vanguard 500 Index Investor 11.70%
FCVSX Fidelity Convertible Securities 17.47%

Why Vanguard Killed a Good Fund
John Rekenthaler
Morningstar
04 Jan 2019

...

Compared with others in the convertible-bond Morningstar Category, the fund’s 15-year total returns have been average and its volatility modest. Its expense ratio, of course, is the category’s lowest. Overall, that’s an attractive combination. Morningstar’s analysts had assigned Vanguard Convertible Securities a Morningstar Analyst Rating of Bronze--indicating that the team has a “sufficient level of conviction that [the fund] will outperform its benchmark or peers … over a full market cycle.” (Not if it’s dead, it won’t.)

The broader view is better yet. As a hybrid investment, carrying both stock and bond characteristics, Vanguard Convertible Securities is best compared with allocation and target-date funds. Over that same 15-year period, it outgained the average for almost all allocation and target-date categories. When it did trail, its returns were only slightly behind, while its volatility was much lower. It was superior.

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