Vanguard Short-Term Investment-Grade Fund Gets Cautious
The fund's managers are weatherproofing the portfolio against expected volatility.
When interest rates rise, bond prices fall. That's the story behind the bond market over the past 12 months, and the Vanguard Short-Term Investment-Grade Fund (VFSTX) – a member of the Kiplinger 25 – shows it.
The fund's negative 2.1% return over the past 12 months trailed its peers, but beat the Bloomberg U.S. Aggregate Bond Index, which lost 3.6%. (Returns are through Feb. 4.)
Interest rates in bonds of all maturities inched higher last year, but short-term rates lifted off from near zero. The two-year Treasury note, which 12 months ago yielded 0.11%, now sits at 1.31%.
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.
That kind of rise will create a negative total return in the fund, which invests in mostly high-quality corporate debt of one- to five-year maturities, says Arvind Narayanan, one of the fund's three comanagers. "Even a short-term-bond fund is sensitive to interest-rate moves."
A year ago, the managers positioned the fund for an economic recovery. They devoted a bigger chunk of assets to triple-B bonds, which boast higher yields. In particular, they homed in on bonds issued by high-quality companies, such as Boeing (BA), that saw their credit ratings slip to triple-B, the lowest rung of investment grade.
"These are bellwether blue-chip names that were willing to sacrifice some of their balance-sheet strength to load up on cash," he says. "That's when we stepped in, because we understand their strategy, and we're being compensated to hold their debt." These positions helped the fund's results – though it isn't obvious from the fund's one-year return – as did a 2% exposure to high-yield issues (bonds rated double-B to triple-C).
The managers are more cautious now and expect volatility ahead. "We're likely to see higher sustained inflation and slowing economic growth," says Narayanan.
They shed some investment-grade and high-yield debt to load up on cash and Treasuries, where 12% of the fund now sits. "We upgraded the portfolio to make it more weatherproof for volatility" and to have cash ready to put to work when the dislocations occur.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
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.
-
Harris Proposes Medicare Cover In-Home Healthcare
Vice President Kamala Harris proposed a plan for Medicare to cover in-home healthcare.
By Alexandra Svokos Published
-
Meta and Microsoft Highlight Big Questions for AR’s Future
The Letter As Meta shows off a flashy AR prototype, Microsoft quietly stops supporting its own AR headset. The two companies highlight the promise and peril of AR.
By John Miley Published
-
Bond Ratings and What They Mean
investing Bond ratings assess the creditworthiness of your bond issuer, can help limit your risk of default and maximize yield.
By Donna LeValley Last updated
-
Bond Basics: Treasuries
investing Understand the different types of U.S. treasuries and how they work.
By Donna LeValley Published
-
Bond Basics: Ownership
investing Bonds come in a variety of forms, but they all share these basic traits.
By Donna LeValley Published
-
Bond Basics: Pick Your Type
investing Bonds offer a variety of ways to grow wealth and fortify your portfolio. Learn about the types of bonds and how they work.
By Donna LeValley Published
-
Silicon Valley Bank, Signature Bank Failures Send Bank Stocks Reeling
Financial stocks continued to sell off following the collapse of regional lenders SVB and Signature Bank.
By Karee Venema Last updated
-
Stock Market Today: S&P 500 Snaps Weekly Losing Streak
AI stocks were big winners on Friday after C3.ai posted solid earnings and guidance.
By Karee Venema Published
-
Stock Market Today: Stocks Bounce Back; UNP Rallies After CEO Splits
The major benchmarks closed higher Monday after notching their worst week of the year on Friday.
By Karee Venema Published
-
Five Ways to Diversify Your Portfolio During a Recession
Investing successfully during a recession is tough. However, you can protect and grow your portfolio with various diversification strategies.
By Justin Grossbard Published