Vanguard High-Yield Corporate Delivers the Cash
It favors the highest-quality junk bonds, which fared much better over the past year than lower-quality debt.
The bond market was “utter chaos” during the sell-off early this year, says Michael Hong, manager of Vanguard High-Yield Corporate (VWEHX) fund, a member of the Kiplinger 25 or our list of favorite low-fee mutual funds. Prices cratered over eight trading days, and liquidity—the ability to buy or sell securities at efficient prices—dried up. “This was as challenging a market as I’ve ever lived through,” says Hong, who joined Wellington Management, the fund’s subadviser, in 1997.
But Hong found order amid the madness. Over the past 12 months, he steered High-Yield Corporate, which invests in bonds with below-investment-grade credit ratings (double-B to triple-C), to a 4.0% return, outpacing 69% of high-yield bond funds and the ICE BofA US High Yield index. Hong typically favors the highest-quality junk bonds (debt rated double-B), which fared much better over the past year than lower-quality debt. The fund holds nearly 55% of its assets in double-B-rated debt; the typical high-yield fund holds 38%.
Hong was on the defensive when the year began. In late 2019, he saw signs of weakness in the economy—downgrades in company credit ratings were outstripping upgrades, for instance—and he bolstered the fund with short-term junk bonds and debt that had recently been upgraded to investment grade. Such bonds tend to suffer less than other IOUs when the market cracks, and they’re easier to unload in a market crisis than traditional high-yield debt. The fund typically holds 6% of assets in cash and Treasuries, so all told, it held 12% of assets in securities that could be quickly converted to cash heading into March.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
These days, Hong is focused on companies benefiting from COVID-related trends that may be long-lasting. Homebuilders, he says, are gaining from what may be a permanent shift to suburban life. Movie theaters, on the other hand, are “long-term secular losers,” he says. “It’s all about credit selection here. We want to keep the risk profile on the conservative side.”
Hong’s keen eye on risk has helped the fund consistently deliver above-average returns with below-average risk. Over the past decade, the fund’s 6.1% annualized return beat 85% of its peers. The fund yields 3.9%.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.
-
Earn Delta SkyMiles Worth Up to $1,800 with an AMEX Business Card
Delta SkyMiles and American Express offer 150,000 on business credit card for new cardholders.
By Ellen Kennedy Published
-
Stock Market Today: Markets Soar Amid Strong Earnings for Big Tech
Equities ended the week on an up note thanks to some of the market's biggest names.
By Dan Burrows Published
-
Stock Market Today: Markets Soar Amid Strong Earnings for Big Tech
Equities ended the week on an up note thanks to some of the market's biggest names.
By Dan Burrows Published
-
Stock Market Today: Markets Tumble Amid Slower Economic Growth and Rising Prices
Disappointing readings on GDP and inflation helped tank equities.
By Dan Burrows Published
-
Stock Market Today: Stocks Run Out of Steam Ahead of Meta Earnings
The Dow Jones Industrial Average snapped a four-day winning streak after Boeing's first-quarter results.
By Karee Venema Published
-
Stock Market Today: Nasdaq Soars Ahead of Tesla Earnings
The EV stock rose nearly 2% ahead of its highly anticipated Q1 earnings report, due after tonight's close.
By Karee Venema Published
-
Stock Market Today: Markets Rebound Ahead of Big Week for Earnings
Equities rallied on easing geopolitical tensions, upcoming quarterly results.
By Dan Burrows Published
-
Stock Market Today: Nasdaq Spirals as Netflix Nosedives
A big earnings boom for credit card giant American Express helped the Dow notch another win.
By Karee Venema Published
-
Stock Market Today: S&P 500, Nasdaq Extend Losing Streaks
The two indexes have closed lower for five straight sessions.
By Karee Venema Published
-
Stock Market Today: Dow Slips After Travelers' Earnings Miss
The property and casualty insurer posted a bottom-line miss as catastrophe losses spiked.
By Karee Venema Published