Vanguard Global Bond Index: December 2022 Update

• Vanguard is a pioneer of passive investing

• This fund provides broad exposure to a mix of global bonds
• A simple, low-cost way to track the Bloomberg Global Aggregate Index Hedged GBP
• This fund currently features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Vanguard Global Bond Index Fund provides exposure to a range of fixed income investments. Its benchmark, the Bloomberg Global Aggregate Index Hedged GBP, includes investment-grade bonds with maturities greater than one year and is made up of a mixture of global government, corporate and securitised bonds.

An index tracker fund is one of the simplest ways to invest, and we think this fund could be a low-cost way to add exposure to global bonds or some long-term growth potential to an investment portfolio. It could also help diversify a portfolio focused on other assets, such as shares, or form the starting point for a portfolio of passive funds.

Manager

Vanguard is a pioneer when it comes to passive investing, having created the first retail index fund over 45 years ago. It now runs some of the largest index funds in the world. Given its size, it has a big investment team with the expertise and resources to help its funds track indices and markets as closely as possible, while having scale to keep costs down.

Vanguard funds are run by a large, global team. They’re spread across three investment hubs around the world – the US, UK and Australia. This team-based approach means there’s no named manager on the fund. As a collective team, Vanguard has run this fund for over 13 years.

Vanguard also has a trading analytics team, which is responsible for ensuring the funds buy and sell investments efficiently and at a competitive cost. This involves analysing data from different brokers and banks. Lower costs should help the funds track their benchmarks as closely as possible.

Process

This fund aims to track its benchmark, the Bloomberg Global Aggregate Index Hedged GBP. The index is made up of a mixture of around 28,300 global bonds. It has a bias towards global government bonds, while the remainder invests in bonds issued by companies. These are all investment grade bonds that are deemed to be more likely to pay off their debts than some higher-risk bonds, such as high yield bonds.

The fund invests in under half the number of constituents in its benchmark, which is known as partial replication. This helps to keep costs down as the fund doesn’t buy and sell every bond that is added to or removed from the index. The fund also invests in higher risk emerging markets in line with the benchmark.

While the team doesn’t invest in every bond within the benchmark, the fund has tended to track its index closely as the team aims to replicate its broader characteristics. For example, they select bonds that together help the fund to closely match the benchmark’s credit rating or yield to maturity. A bond’s credit rating is an assessment of the ability to pay back its debt, while the yield to maturity is the total expected return if the bond is held until it matures.

Vanguard’s global team provides 24-hour market access and consistent fund and bond price monitoring. The team also has access to local bond traders and these relationships can help the team find bonds at attractive prices.

The team also uses currency hedging to convert overseas currency bonds back to sterling. The prices and income of global bonds can fluctuate alongside foreign currency movements, adding volatility for UK investors. By using hedging, investors could experience less extreme price movements over time, which helps smooth returns. This could provide a different type of return and help diversify an investment portfolio that already has exposure to company shares or overseas currencies. This can be achieved by using derivatives which can add risk where used.

Vanguard is more conservative than some other passive fixed income providers. For example, they don’t lend the investments within this fund to other providers in return for a fee, known as securities lending.

As this fund is listed offshore investors are not usually entitled to compensation from the UK Financial Services Compensation Scheme.

Culture

Vanguard is currently the second largest asset manager in the world and runs just over $8.1trn of assets globally as of October 2022. The group aims to put the client at the forefront of everything it does, which drives its focus on quality, low-cost index products.

Jack Bogle founded Vanguard in 1975 and it’s owned by investors. This allows Vanguard to redirect its profits back to investors in the form of lower fees, instead of paying dividends to external shareholders. Bogle believed in creating products that simply track the performance of a market rather than taking a shot at picking individual stocks which may beat them.

The team running this fund works closely with other fixed income research and risk departments across the business. They have daily and weekly meetings to discuss ongoing strategy which could add good support and challenge on how to run the fund effectively.

ESG Integration

Vanguard is predominantly a passive fund house. While it has offered exclusions-based passive funds for many years, it has lagged peers in offering passive funds that explicitly integrate ESG (Environmental, Social and Governance) criteria by tracking indices that tilt towards companies with positive ESG characteristics, and away from those that don’t.

Vanguard’s Investment Stewardship team, which consists of over 60 people, carries out most of the firm’s voting and engagement activity. Their stewardship activity is grounded in the firm’s four principles of good governance: board composition and effectiveness, oversight of strategy and risk, executive compensation and shareholder rights. The Stewardship team also produces frequent insights on their engagement activity at both a corporate and governmental level.

Vanguard has recently left the Net Zero Asset Management initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. We view this as a disappointing backward step, but we’re encouraged that the company will continue to engage with companies on climate-related issues.

The Vanguard Global Bond Index Fund tracks an index that does not specifically integrate ESG considerations into its process. The fund can therefore invest in bonds issued by companies in any sector.

Cost

The fund has an ongoing annual fund charge of 0.15%. We believe this is reasonable when compared to other global fixed income trackers in the market. Our platform charge of up to 0.45% per annum also applies.

Performance

The fund aims to track the Bloomberg Global Aggregate Index Hedged GP and has done so well for the last 10 years*. As expected from a tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped to keep performance as close to the index as possible. Past performance is not a guide to the future.

Bond markets, including the Bloomberg Global Aggregate Index Hedged GBP, performed well from the fund’s launch until 2022, which benefited the fund’s performance.

However, over the past year bonds have faced headwinds, mostly in the form of rising inflation and interest rates, which make the future value and income paid by bonds look less attractive. Over the last year to the end of November, the fund fell 13.16%.

Bond yields move in the opposite direction to prices, so yields have increased over the course of the year. The yield for the Vanguard Global Bond Index Fund was 1.70% as of the end of October. Bond yields are not guaranteed and can change over time.

Given Vanguard’s size, experience and expertise, we expect the fund to continue to track the benchmark well in the future, though there are no guarantees. As the currency of overseas bonds is hedged back to sterling, we expect the fund’s performance to be less volatile over time compared to an equivalent unhedged fund.

A glance at the five-year performance table below shows that the fund has seen both positive and negative returns. This reflects the performance of the underlying benchmark, which it follows closely. Remember, past performance isn’t a guide to future returns.

Past performance is not a guide to the future. Source: *Lipper IM 30/11/2022.

Find out more about the Vanguard Global Bond Index fund, including charges

Vanguard Global Bond Index Key Investor Information