28 May 2020

Is The New ‘Bond King’ a Machine?

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The new bond king is an index fund. For years, that title belonged to Bill Gross, the high-profile, sometimes controversial manager of Pimco Total Return Fund, which grew to be the world’s largest bond fund. But Mr. Gross’s abrupt departure from Pacific Investment Management Co. led to a rush of redemptions by fund investors. And Total Return’s assets have fallen below the combined dollars in a pair of bond index funds from Vanguard Group that use the same strategy as each other.

Like other index funds, the two Vanguard Total Bond Market Index funds have a named portfolio manager—in this case, the little-known Joshua Barrickman. But the choice of investments doesn’t rely on human judgment of the most promising bonds to buy. Instead the portfolio’s holdings are tied to an index of bonds set by an outside firm. From there Vanguard uses sophisticated computer “optimization” models to build a portfolio that tracks as precisely as possible the performance of the index.

At Pimco Total Return’s peak size in April 2013, the fund held $293 billion in assets. The heavy redemptions in the wake of Mr. Gross’s abrupt departure in late September followed months of smaller investor withdrawals amid flagging performance. As of last week, Total Return was down to about $202 billion in assets, Pimco says.

Vanguard Group’s Total Bond Market Index portfolios hold a combined $209 billion. They track the broad Barclays US Aggregate index. This year alone the funds have taken in $15 billion, according to researcher Morningstar.

The primary fund, often referred to as Vanguard Total Bond Market Index I, holds $124 billion—including the assets of its exchange-traded share class. Then there’s Vanguard Total Bond Market II Index Fund, which has $84.7 billion.

Total Bond II was spun off from the original fund in 2009 to create a portfolio that Vanguard’s target-date funds could use as a core bond holding.

Total Bond I and II have an identical strategy and benchmark, though the specific holdings can be somewhat different.   The performance of the two funds tends to be very close: Total Bond I is up 4.11% this year and Total Bond II, 4.16%.

It’s fitting that in today’s markets, where investors have been shifting money from actively run portfolios to index funds, it’s now an index fund that’s wearing the crown of largest bond fund.

Vanguard Group also lays claim to the largest stock mutual funds: the $355 billion Vanguard Total Stock Market Index fund and the firm’s twin S&P 500 tracking funds, the $183 billion Vanguard 500 Index fund and the $178 billion Vanguard Institutional Index.

While the original Total Bond fund was launched in 1986—10 years after Vanguard’s S&P 500 index fund—Mr. Barrickman sees the trend toward bond indexing as in its early stages. Dan Wiener, of the Independent Adviser for Vanguard Investors newsletter, adds that “it’s a good bet some of that Pimco money helped Vanguard achieve its record.”

Click here to access the full article on The Wall Street Journal. 

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