As you navigate the later stages of the economic cycle, credit quality may be an increasing concern as you look to manage your clients’ fixed income credit risk exposure.
We’ve heard that many advisors are particularly worried about the growth of today’s BBB investment-grade universe and whether those bonds will become the fallen angels of tomorrow.
U.S. investment-grade corporate bond ratings
Source: Bloomberg Barclays U.S. Corporate Investment Grade Index, as of September 30, 2018.
Three practical decisions might help reduce the anxiety you may be experiencing as you evaluate fixed income funds for your clients.
Pick a manager with a deep bench
A worldwide team of more than 175 experienced credit analysts, interest rate specialists, risk managers, and economists has the capacity to scour the vast universe of bond issuers to find those truly worthy of purchase.
Vanguard’s global analysts conduct deep, fundamental bottom-up credit analysis to form an independent opinion and rating of the issuer. Their recommendations, combined with our outlook on the global economy and central bank policy, inform our portfolio positioning.
Choose a nimble manager with sizable market access
While the bond market increasingly relies on electronic trading, the majority of trades are still performed on a “request for quote” basis. Our significant market presence gives us better access to bond dealers. Our ability to build strong relationships with dealer firms also helps us remain a nimble active bond manager.
Vanguard’s considerable scale gives us the access and leverage to provide timely, cost-efficient trade execution and preserve value for our clients. In addition, our team’s collaborative approach and focus on a select number of credit funds enable us to act quickly, especially in today’s challenging environment.
Select products that combine the advantages of both
If you want to limit your clients’ exposure to potential fallen angels, consider Vanguard’s suite of actively managed investment-grade credit bond funds.
Our short-, intermediate-, and long-term options are structurally higher in credit quality, containing less exposure to BBB and below securities than their peer group average*. In addition, each fund focuses on a diversified approach to the higher-quality credit market by investing across multiple credit sectors and limiting exposure to any one issuer. As a result, we expect them to hold up better than average corporate bond strategies during times of market stress.
Vanguard, the 44-year-old mutual giant famous for popularizing index investing, has completed one of the most noteworthy implementations of blockchain technology for a financial institution to date. It’s now using blockchain—the distributed ledger software that underpins cryptocurrencies like bitcoin—to help manage data for some of its most widely used financial products, including its largest mutual fund, the $800 billion Total Stock Market Index Fund.
Since February, Vanguard has been using a blockchain product to ingest data for $1.3 trillion worth of funds, or one quarter of its total $5.2 trillion in assets under management. Many financial institutions have been implementing and testing blockchain on a limited scale, as Forbes recently reported in our first-ever Blockchain 50 list. But Vanguard’s project is live as the back-end platform powering millions of customer accounts. It’s likely the first major financial institution using blockchain for a core service.
The company behind Vanguard’s blockchain experiment is Symbiont, a six-year-old New York startup with 75 employees. Symbiont’s products aim to serve different functions for financial institutions, ranging from tracking the full life cycle of a mortgage security to settling securities trades. For now, Vanguard uses Symbiont just to manage index data.
The data source Vanguard uses for its mutual fund indexes isn’t changing. What’s new is its process for pulling in the data. Since 2012, Vanguard has used the Center for Research in Security Prices (CRSP), a research center at the University of Chicago, to support many of its indexes. CRSP indexes are baskets of securities that aim to mirror the value of a given market. Its research dictates what stocks should be included in a given index and what their concentration should be.
Before working with Symbiont, Vanguard used a manual process to update its CRSP-based indexes. It received individual files with point-in-time securities data. Then it had to clean that data, load it into a separate database and perform checks to ensure its accuracy, says Warren Pennington, head of Vanguard’s fintech strategies team. “All day long, throughout the day, we had data team members making sure they could keep data in sync with what CRSP had in mind,” he says.
With Symbiont’s blockchain platform, Assembly, Vanguard has “a synchronized database that is constantly updated every time CRSP makes a change to the index,” Pennington says. “No more manual updates or manual pulling of data. No more manual reconciliations.”
Technically, you don’t need a blockchain to get instant updates to a shared database—that could be done with older technology. But Symbiont has pursued a blockchain architecture to try to increase client trust. Its blockchain aims to serve as an independent third party that hosts information securely across a network of computers that Symbiont doesn’t own (they’re owned by the organizations participating in the shared blockchain ledger), preventing Vanguard from having to trust the startup to keep the data safe.
For now, Vanguard, Symbiont and CRSP are the only organizations with access to the index data blockchain. But Ron Papanek, a managing director at Symbiont, says half a dozen other asset managers have run test versions of the software and are considering participating.
Vanguard first started working on this project in mid-2017, and using a team of less than ten people, it took nearly two years to go live. “One of the challenges in a highly regulated industry is just lack of familiarity,” Pennington says. “That’s what takes time—letting people get familiar.” Much is at stake—any errors can cause Vanguard’s funds to fall out of sync with the markets they’re trying to track, which would lower the quality of its products and could scare off investors.
For Vanguard funds that use CRSP indexes, Symbiont’s software has fully replaced Vanguard’s old system of manual data updates. Pennington says Symbiont’s software has saved time for Vanguard, but that’s not the primary goal. “It’s more like an R&D investment with an actual deployment as a result, which truly improved the way we run our fund.”
Pennington isn’t yet ready to use blockchain to replace a higher-stakes process, like clearing trades, but he’s not ruling it out for the future. “This project isn’t the end,” he says. “It’s a step where we thought we could get more comfortable.”
- Vanguard Group is testing a blockchain-powered platform that would allow asset managers to trade currencies without using major banks as intermediaries, Bloomberg reported Thursday.
- The currency market handles $6 trillion each day, and is currently dominated by firms like JPMorgan Chase and Citi.
- Vanguard’s platform would skirt the banks’ fees through peer-to-peer trading, and has already handled a few trades, a source told Bloomberg.
- Visit the Markets Insider homepage for more stories.
Vanguard Group is testing a blockchain-powered platform for asset managers to trade currencies, Bloomberg reported Thursday.
An entry into the sector from Vanguard could bring long-sought change to the bank-dominated currency market. The investing giant already disrupted the finance world by introducing low-cost index funds to the masses.
Asset managers currently rely on banks as intermediaries for currency trades, even after buy-side companies began matching trades on electronic services in the 2000s. The system being tested by Vanguard would sidestep the traditional players and their fees, Bloomberg reported.
The investing giant’s service has been working for two months and has already handled some trades, a source told Bloomberg. The platform uses the same blockchain technology behind bitcoin to match trades, and could cut trade expenses if enough users join the service.
“In theory, it sounds great because you can reduce your costs if you can match directly with someone else who has a countervailing interest,” Campbell Adams, a former Deutsche Bank senior currency trader and the founder of ParFX, told Bloomberg. However, such a platform “will require a critical mass of users” if it wants to bring a discount advantage to the massive sector, he added.
The investment advisor has previously hinted at efforts to compete in peer-to-peer trading. Andy Maack, Vanguard’s global head of foreign exchange trading, told The Trade there’s a “tremendous amount of interest in the potential for disintermediation.”
Peer-to-peer trade matching “is pretty intriguing, especially for the foreign exchange markets which only really started to seriously explore this topic in recent months,” he added in the September interview.
The company didn’t comment further on plans for the platform, but noted its interest in currency hedging and lowering “the cost of investing for all investors.”
“Vanguard is currently piloting a project focused on improving the efficiency and reducing risk of FX hedging,” Vanguard spokesperson Carolyn Wegemann said in a statement to Business Insider. “Given the project is still in the pilot stage, we can’t comment further.”
Vanguard has more than $5 trillion in worldwide assets and is the world’s largest provider of mutual funds. It also provides exchange-traded funds that track major stock indexes.
BlackRock Inc. BLK -0.21% said it would take a tougher stance against corporations that aren’t providing a full accounting of environmental risks, part of a slew of moves by the investment giant to show it is doing more to address investment challenges posed by climate change.
Among the moves, BlackRock said it would be increasingly disposed to vote against management and boards if companies don’t disclose climate change risks and plans in line with key industry standards.
BlackRock is also pulling back from thermal coal producers in actively managed debt-and-equity portfolios by mid-2020, a move that will lead to $500 million in sales. It will expand the range of sustainable investment products as well as double to 150 the number of exchange-traded funds that address environmental, social and governance challenges.
BlackRock is the world’s largest asset manager, with about $7 trillion under management. It has risen on the back of index funds that trade on exchanges and through these funds has extended its reach across nearly every company and is part of the retirement accounts of millions of people around the world. The firm also sits at the backbone of Wall Street as its software is used by banks to monitor their risks.
The firm said it is putting the focus on sustainability because the costs of climate change have ramifications on the price of assets and the financial ecosystem.
“Climate change has become a defining factor in companies’ long-term prospects,” BlackRock Chief Executive Laurence Fink said in his annual letter. “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”
The letter is a reflection of Mr Fink’s towering influence over companies. But the letter has rankled some rivals who have sometimes grumbled about what they consider to be a moralistic tone.
The rise of index funds transformed three firms into major forces in corporate America and thrust them into the public spotlight. The biggest—
- Vanguard Group and
- State Street Corp.
—hold roughly a fifth of the S&P 500 through funds they run for investors. They can cast critical votes and have the ears of chief executives. How they exercise this power—or choose not too—has ripple effects across markets.
All three have faced questions over their responsibilities as shareholders on behalf of investors in funds they run. In years past, these firms have targeted gender diversity in boardrooms among other issues.
Lately, there has been increased pressure on them to do more on climate change.
BlackRock’s offices around the world have been frequented by activists who blast the firm for being slow to act on green issues. The firm has debated a question internally: how can BlackRock ensure it has public support to operate in the countries where it does business as it continues to grow?
The firm said it would provide more information on data on the carbon footprint and other potentially controversial holdings in its mutual funds. It also said it would disclose more details of its conversations with the companies its funds invest in. BlackRock also recently said it had joined Climate Action 100+, the world’s largest group of investors by assets pressuring companies to act on climate change.
The moves come as regulators are scrutinizing ESG funds across the asset-management industry in an attempt to determine whether those claims are at odds with reality.
“Over the next few years, one of the most important questions we will face is the scale and scope of government action on climate change, which will generally define the speed with which we move to a low-carbon economy,” Mr. Fink said in his letter.
He added that “while government must lead the way in this transition, companies and investors also have a meaningful role to play.”