Displaying items by tag: vanguard

According to Vanguard, investors that allocated part of their portfolios to low-yielding municipal bonds at the beginning of last year should now be looking forward to the prospect of higher income, thanks to a rapid rise in rates. In a fixed-income report for the first quarter, the fund firm wrote, “Following a year with $119 billion of outflows from municipal funds and ETFs, we expect the tide to turn. For high-income taxable investors, we are expecting a municipal bond renaissance.” According to the report, muni bonds only offered yields of around 1% at the start of 2022, compared to yields that now exceed 3% before adjusting for tax benefits. Tax-equivalent yields are at 6% or even “meaningfully higher for residents in high-tax states who invest in corresponding state funds.” Vanguard said that this makes munis a “great value compared with other fixed income sectors and potentially even equities—especially with the odds of a recession increasing.” According to the Vanguard report, muni bonds also remain strong from a credit perspective, with attractive spreads over comparable U.S. Treasurys and corporate debt. In fact, municipal balance sheets are stronger now than they’ve been in two decades, leaving states well-prepared to navigate an economic slowdown.

Finsum:According to Vanguard, higher yields and solid balance sheets make muni bonds a highly attractive option for investors this year.

Last month, the Vanguard Group decided to drop out of the Net Zero Asset Managers initiative, whose members commit to making their investment portfolios emission-neutral by 2050. The decision by Vanguard emphasizes the notion that retail investors are less focused on ESG priorities than institutional investors. The fund giant said that 80% of its nearly $8 trillion in assets are in index funds, which typically attract retail investors. The rationale for the decision, according to Vanguard was that it was responding to the desire of its clients to provide "clarity" and make its independence clear. Vanguard's largest competitors, BlackRock and State Street rely more on institutional investors such as pension funds and foundations. Todd Rosenbluth, head of research at VettaFi told Reuters that “Institutional investors focus more on climate and other ESG priorities amid pressure to do so by clients, regulators and investment activists. BlackRock and State Street are appealing to an investment base that cares more about ESG." Both BlackRock and State Street have stuck with the Net Zero Asset Managers initiative. Rosenbluth also stated that “Many retail investors are also interested in matters like climate change, but prioritize them less in building retirement portfolios.” That matches a FINRA Investor Education Foundation study of retail investors last year that found only 9% of respondents held ESG investments.

Finsum:Many retail investors are interested in climate change, but prioritize them less in building portfolios, while institutional investors focus more on ESG amid pressure from clients, regulators, and activists.

Much has been talked about regarding the failure of the 60/40 portfolio last year, but Vanguard analysts recently suggested that investors shouldn’t abandon a balanced portfolio strategy. Roger Aliaga-Diaz, portfolio construction head for Vanguard, and his team said in a recent note that “A balanced portfolio still offers the best chance of success.” Aliaga-Diaz noted that while the negative correlation between stocks and bonds broke down last year, “longer term, however, the data support balanced portfolios.” The firm noted that “The policy response to higher and more persistent inflation and the subsequent repricing of risk in global capital markets has led to a dramatic shift in our time-varying asset allocation (TVAA) outlook.” The TVAA looks to harvest the risk premiums for which the Vanguard thinks there is modest return predictability. Based on the firm’s current outlook, Vanguard’s optimal TVAA portfolio “calls for a 50/50 stock and bond split, and favors bonds and emerging markets.” Specifically, Vanguard’s TVAA allocation suggests 30% U.S. stocks, 20% international (divided equally between developed and emerging markets), 22% international bonds, and 27% U.S. fixed income (mostly in U.S. intermediate credit bonds). The firm noted that the interest rate tightening cycle in 2022 raised its expected bond return forecasts by more than the equity sell-off raised expected equity returns.

Finsum:While the 60/40 portfolio failed last year, Vanguard believes a balanced portfolio still offers the best chance of long-term success and recommends a 50/50 stock and bond split.

There is no doubt that government bond and corporate debt markets have taken a beating this year due to inflation and rising interest rates. But that may change next year if two fixed-income strategists are correct. On Tuesday, Gurpreet Gill, macro strategist, global fixed income at Goldman Sachs Asset Management said that “The year ahead is shaping up as the most promising for fixed income in over a decade.” While speaking at the Edelman Smithfield Investor Summit in London, Gill noted that valuations in fixed-income markets were looking more appealing than they were a year ago. This included emerging markets and corporate bonds. She stated, "We think it makes sense to be in high-quality short-duration assets, in agency mortgage-backed securities markets in the U.S." Gill isn’t alone in those thoughts. Sara Devereux, global head of Vanguard Fixed Income Group, said last Friday that “The recent debt rally brought the chance to reduce credit exposure and buy mortgage agency securities based on valuations, setting up what promises to be a bond picker’s paradise in the new year.”

Finsum:Two fixed-income strategists expect next year to be a great year for bond pickers due to lower valuations.

Vanguard is expanding their model portfolio selection for their ‘LifeStrategy’ brand on two fronts an MPS Classic and MPS Global. The MPS will have a total of five model portfolios which will be based in index funds giving a variety of risk preference choices to investors. The least risky models have a 20% equity exposure while escalating all the way to 100%. The MPS will definitely favor UK investments in both bonds and equities, but the global funds will be strictly a market cap weight. Vanguard is hoping the development of more model portfolios will deepen their relationship with financial advisors, by giving them better options to suit their end clients needs.