Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Vanguard High-Yield Corporate’s well-constructed and relatively conservative approach helps it stand out from high-yield bond peers.

This strategy’s management team underwent material changes over the last three years. Wellington Management subadvised the strategy on behalf of Vanguard for more than four decades. But in 2022, Vanguard announced a subadvisor change and handed the management of one third of the portfolio’s assets to its own high-yield bond group, led by portfolio manager Michael Chang. This shift left the other two thirds of the fund with the Wellington team, led by longtime manager Michael Hong. Around that time, Elizabeth Shortsleeve joined Hong as manager for the Wellington sleeve. Then, the following year, Hong was unexpectedly removed from the portfolio and later officially retired from the firm at the end of 2024.

Now, two relatively less-tenured high-yield bond managers oversee the strategy. Shortsleeve, who joined Wellington in 2007, has a strong high-yield credit background and extensive familiarity with the firm’s well-resourced high-yield platform, but she brings just two years of experience as lead manager of this high-yield mandate. Chang joined Vanguard in 2017 from Goldman Sachs and brings over two decades of investment experience, including a stint comanaging Goldman Sachs High Yield Floating Rate, but he similarly lacks much of a public record as the lead of a high-yield bond portfolio.

While these changes continue to give us pause, the strategy’s time-tested process remains intact. Although each team makes independent decisions on their sleeve, Vanguard’s active high-yield team takes a similar tactic to Wellington’s historically successful approach. The managers continue to take less credit risk than most peers in the high-yield bond Morningstar Category, and that’s a reflection of the managers’ view that the high-yield market has an asymmetrical risk/reward profile. Put simply, a high-yield investor may lose all or a significant portion of their investment when a company goes bankrupt, despite limited upside potential, especially for a bond purchased at par. The portfolio’s composition reflects this risk-aware approach; its 5% stake in CCC rated debt, the riskiest segment of the high-yield market, sat well below the typical peer’s 10% allocation in June 2025.

As the managers build on their respective track records, the strategy has a good shot of adding to its history of strong risk-adjusted long-term performance, given its low fees and anchor subadvisor Wellington’s proven process.

As subadvisor of this portfolio’s largest sleeve, Wellington’s thorough credit analysis and liquidity management supports an Above Average Process rating.

This strategy’s assets are managed in two distinct sleeves. The largest (two thirds of assets) is subadvised by Wellington and uses a quality-focused process that stands out for its emphasis on risk management and liquidity. The second sleeve (one third of assets) has been managed by Vanguard since August 2022. While this approach has many similarities with Wellington’s, it has a shorter track record and is less established.

Each manager makes independent decisions on its portion of portfolio assets, but both tend to focus their purchases on higher-quality bonds within the high-yield universe, which is evident in the portfolio’s above-average credit quality compared with high-yield bond peers. They manage versus a custom benchmark (a 95%-5% split of the Bloomberg US High Yield Ba/B 2% Issuer Capped and Bloomberg US Treasury 1-5 Year indexes), and small stakes in investment-grade corporate bonds, US Treasuries, and cash help elevate the portfolio’s liquidity profile. This approach has led to a relatively resilient portfolio when credit markets falter, and it provides opportunities during periods of market volatility for the managers to buy cheaper bonds they believed unfairly sold off or to meet outflows without selling bonds at a discount.

Bank loans and convertible debt will remain less than 10% of assets, and equity is rare. Wellington’s team, however, has the latitude to invest in non-US high-yield issuers; Vanguard rarely ventures into that space. Still, sector and issuer preferences will likely drive most divergences in their portfolios.

Elizabeth Shortsleeve, the relatively new lead manager for Wellington’s sleeve, continues to follow the successful approach honed under former lead Michael Hong, but she has opportunistically added more credit risk within the strategy’s risk guardrails. Vanguard’s Michael Chang has followed a similar path. During the last three years through June 2025, the portfolio’s stake in B rated bonds increased 6 percentage points at the expense of higher-quality BBB and BB rated debt. But investors can still expect the fund to carry less credit risk than the typical high-yield bond peer and the broad high-yield market, represented by the ICE BofA US High Yield Index.

Despite the strategy’s relative conservatism, both managers can opportunistically dip down the credit-quality spectrum. For instance, the portfolio’s overall holdings in bonds rated CCC and lower hovered around 5% over the one-year period, as the managers held on to attractive opportunities in select lower-rated issuers. Still, out-of-benchmark exposure to CCC rated and below bonds remained below the 10% limit and lower than the typical peer’s 10% allocation, as both subadvisors maintained their relatively defensive stance because of unattractive valuations levels.

The portfolio’s industry allocations can drift from the benchmark’s and are mostly dictated by the bottom-up security-selection opportunities that surface in the market as well as the managers’ top-down views to a degree. During the last two years, both managers increased their exposures to financials companies by roughly 4 percentage points, specifically insurance brokerage companies with strong fundamentals.

The managers of both sleeves are relatively less tenured, which warrants a People rating of Average until we feel more confident with the current management configuration.

Vanguard implemented a number of personnel changes over the last few years. In 2022, Wellington, the longtime sole subadvisor, saw one third of the portfolio’s assets transfer to Vanguard’s high-yield bond team. Additionally, Elizabeth Shortsleeve joined as a comanager alongside Wellington veteran Michael Hong. Then, Hong was unexpectedly removed in July 2023, leaving Shortsleeve in sole charge of the sleeve.

Although Shortsleeve, who joined Wellington in 2007, has a strong high-yield research background and extensive familiarity with the firm's deep resources, she has just two years of experience as lead manager on a conservative high-yield mandate like this one. Given that standout researchers don’t always turn into top portfolio managers, it will take time to build confidence in her ability to execute this strategy. She leads a strong team of 18 US- and London-based high-yield/bank-loan researchers and taps into eight traders, a quantitative analyst, and a dedicated legal support staff for added support.

Since August 2022, Vanguard manager Michael Chang has overseen one third of assets. He joined the firm from Goldman Sachs in 2017 to build out Vanguard’s high-yield team and capabilities. Although his industry experience dates back to 2000 and includes a stint comanaging Goldman Sachs High Yield Floating Rate, he lacks much of a public record with the firm’s resources. The credit research team, led by high-yield veteran analyst Brian Kim, has grown to nine members. And while most pieces are in place, the team has more to prove.

Shortsleeve invests USD 500,000 to USD 1 million in the strategy, while Chang has no investments. Manager ownership, a mark of the manager’s commitment alongside investors, could be better.

Vanguard maintains its High Parent Pillar rating as it continues to grow under new leadership.

CEO Salim Ramji has had a busy first year captaining Vanguard’s crew, and the ship remains pointed in the right direction. The firm made its largest round of fee cuts in early 2025, which came at an estimated cost of USD 350 million. It established a separate division dedicated to its advice and wealth management efforts, a sign that it wants to seriously compete within those lines of business. Asset growth has continued to be a huge success. Only BlackRock’s inflows rival the money Vanguard is taking in. Likewise, the number of clients it serves has more than doubled since 2015.

Despite that success, an ever-growing number of clients has presented a challenge: Vanguard can’t grow its services fast enough to keep up with demand. In some instances, it has had to curb certain services and capabilities or raise fees on others to cope, causing some loyal clients to criticize what they perceive as deteriorating services.

Vanguard has ambitions to bring its disruptive legacy to the bond market. It created roughly a dozen low-cost bond exchange-traded funds for US investors and several others abroad over the 12 months through June 2025. All have low fees in their respective categories, and the actively managed strategies align with Vanguard’s philosophy. They are relatively easy to understand and are conservatively managed.

Vanguard has another opportunity to prove that clients are still its priority. On the surface, its endeavor into the high-fee deal-making world of private assets alongside Wellington and Blackstone looks like a cultural mismatch. So far, the collaboration hasn’t produced anything that’s concerning.

The fund has a solid long-term record thanks to former lead Wellington manager Michael Hong, who ran the entire portfolio between March 2008 and July 2022 and two-thirds of it until July 2023. Performance since July 2023 reflects the current management’s track record.

The strategy’s typically smoother ride shouldn’t change too much with the July 2023 Wellington management shakeup and the August 2022 addition of Vanguard’s in-house high-yield team. Like Wellington, Vanguard’s high-yield team focuses on credits with relatively higher ratings, while keeping a decent chunk of the portfolio in cash and US Treasuries to mitigate drawdowns during credit selloffs.

As such, performance can fall behind during high-yield market rallies, like in 2023 when lower-rated credits outperformed their higher-quality counterparts. The strategy’s 11.7% gain trailed its typical category peer by 72 basis points and its benchmark by 40 basis points because of its higher-quality bias, as well as a poor call holding a sizable position in Credit Suisse’s Additional Tier 1 bonds (the most subordinated type of debt securities), which were wiped out in March 2023.

More recently, though, the strategy kept pace with most peers in 2025 through July. Its 5.5% return beat the typical peer’s 4.8% gain and ranked in the category’s top quartile. Strong picks in energy companies, as well as the managers’ success in navigating April’s tariff-induced volatility, helped the fund stand out from competitors and highlighted the benefits of this relatively conservative approach.

Vanguard High-Yield Corporate Inv's Prospectus Adjusted Expense Ratio is 0.22% per year. It places it in the cheapest quintile of the Morningstar US Fund High Yield Bond Category, where the median fee is 0.75% per year. This cost positioning translates into a Medalist Rating Price Score of 2.33, which reflects its relative price positioning within the category. The Price Score ranges from -2.50 (most expensive) to +2.50 (cheapest), with higher scores indicating better cost competitiveness.