Vanguard Sets Sights on Active Fixed Income

Bond issuers beware.

Vanguard’s new CEO Salim Ramji — the former BlackRock executive who became the first-ever outsider to lead the investment giant in July — isn’t wasting time. One of his first priorities for the world’s second-largest asset manager is a new push into the actively managed fixed-income market. The $9.3 trillion firm is looking to bring massive scale to a bond market it says is primed for change. Vanguard has already filed for two active municipal bond ETFs that are slated to go live this year and launched two active bond ETFs in December.

“If you think of the fixed income market today … it’s far more antiquated, it’s far less transparent, far more expensive,” Ramji said at a Financial Times conference last week. “I think there’s an opportunity that Vanguard has to change that dynamic.” 

The Fix Is In

A Vanguardian-sized play for active fixed-income products would likely have a massive impact on the market. Just 10% of Vanguard’s assets are currently in actively managed fixed-income vehicles, according to the FT. The cheapest Vanguard product in the segment costs just 10 basis points, compared to the average active fixed-income exchange-traded fund fee of about 50 basis points. Based on Vanguard’s storied history in the passive indexed universe, a larger push would almost certainly put pressure on fees, and has the potential for major disruption.

“Vanguard and other fixed-income providers have been sidelined for the last few years,” said Monish Verma, CEO of Vardhan Wealth Management. “As rates start to decline, investors who have been predominantly equity investors will now start taking a strong look.”

Pro Active. While equities have been on a tear in recent years, bond instruments have also been pulling in impressive inflows. Money market funds that invest in high-quality, short-term debt and cash equivalents soaked up $106 billion in assets in August alone, hitting record highs. And Gundlach’s famous “T-Bill and chill” game plan looks like it’s still in full effect.

“The change in rates provides a positive opportunity in the fixed-income market,” Verma said. “Investors who have been shy of fixed-income investments will now start to take a second look.”

While not all actively managed funds beat benchmarks, that hasn’t necessarily been the case with active bond products. A new Morningstar report found active fixed income was one of the best-performing categories in recent years, with roughly two-thirds of active bond funds beating a passive counterpart in the trailing year through June. (Wouldn’t have bet on that one.) The research also found:

• Almost 4 in 10 of the funds provided better returns than benchmarks over the past 15 years.
• Active bond funds’ winning rate led all other asset classes over the same period, according to Morningstar.