Changes at Vanguard, but Our Confidence Remains

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Vanguard has recently seen some personnel changes in its fixed-income effort, and that has some implications for fundholders. Joining me to discuss the changes and discuss the implications are two of Morningstar's fixed-income manager research analysts, Emory Zink and Alaina Bompiedi.

Ladies, thank you so much for being here.

Emory Zink and Alaina Bompiedi: Thank you for having us.

Benz: There have been a number of changes at Vanguard. Let's talk about the most immediate one, Alaina, the departure of Greg Nassour. That one sounds like it was somewhat unexpected.

Bompiedi: Greg Nassour was leading Vanguard's corporate bond desk, and he had overseen just over $100 billion in funds for Vanguard, six funds in all, two of which we had under coverage, these being Short-Term Investment-Grade and Intermediate-Term Investment-Grade. The Short-Term Fund is the largest, just over $60 billion.

Benz: Emory, there are also some other changes going on at an even more sort of senior executive leadership level in the fixed-income shop.

Zink: Simultaneously, and this is separate from the Nassour departure, but on the municipals team the long-time head of the municipals group, Chris Alwine, he is going to be moving to lead the U.S. fixed-income taxable side. He had led the municipal group of Vanguard for a little over a decade, and his replacement will be an individual by the name of Paul Malloy. He is no stranger to Vanguard. He actually previously had worked on their fixed-income ETFs in the United States. Prior to taking this particular job, he headed up European Credit Research in London. He will be new, and at first, we were kind of curious because he didn't have a background in municipals, but we have a lot of comfort in the fact that Alwine is remaining with Vanguard and is going to help with that transition as Malloy takes over as head of Vanguard's municipal income group.

Benz: Alaina, with Nassour's funds, I know they have named some interim managers, but sounds like the search is still on for permanent managers?

Bompiedi: That's right. The search is still on. Vanguard is looking to hire a portfolio manager to lead their corporate bond desk. In the interim, it named two of its current portfolio managers, Daniel Shaykevich and Samuel Martinez, as lead managers of Nassour's funds in his stead.

Benz: Let's talk about the review process that you and the team undertake when you do see significant manager changes or changes in executive leadership like this. Emory, can you talk about what the team does at that point?

Zink: When we learn that there is going to be a significant change up top, we of course want to take a fund through review and see how it's going to impact its process, whether we think there are going to be any major changes. In the case of the municipal group, they really have a very strategic and systematic way of running their funds. When we looked at that adjustment, which was the head of municipal group, so Chris Alwine, we asked are there going to be any adjustments to the process, are there going to be any changes to the resources. Ultimately, all the support staff in the case of the municipal funds--the portfolio managers, the credit analysts, the traders--they are all going to be very consistent. Given that Alwine was going to provide help with that transition, there really wasn't going to be much of a change. We maintained all of those ratings and ultimately, didn't think that it would impact the process. Part of our job is, we continue to monitor that in case there are eventually any adjustments. It's a little different in the case of the taxable side.

Bompiedi: On the taxable side, Greg Nassour has been overseeing portfolio management and trading more broadly for all of Vanguard's corporate bond investments. That was something that we were considering when we were evaluating the People Pillar there. He just had a lot of responsibility, and because that seat is still unfilled, that was a big factor in our ratings review process.

Benz: A broader question, and Emory, you alluded to this--you both alluded to this really--these funds have always been run in a very disciplined fashion. The managers don't have a lot of leeway by charter to make any crazy bets and the low costs are a main advantage. Broadly speaking, investors in Vanguard's big bond funds that might have been affected or touched by some of these changes, do they have reason for concern?

Zink: I would say one of the reasons that we really have a lot of confidence in a number of Vanguard's funds are these sorts of sources of advantage, and none of these have been impacted by sort of the changes up top. Things that you had mentioned, the low fees, the conservative guardrails, they are very systematic, and Vanguard is known for its very efficient implementation and diversification. All these things still hold. If an investor is looking at their Vanguard funds and wondering, should I make an adjustment based on these changes, we a lot of confidence in those funds. I think that's somewhat reflected in the fact that they all still have medalist ratings on those.

Benz: Alaina, in the case of the funds that you look at, you have maintained them as medalists. They got downgraded a little bit to Bronze, but that still signals the level of conviction?

Bompiedi: That's right. The Bronze is still signaling our conviction there. We just wanted to emphasize our hesitation, just because someone hasn't been named in Nassour's stead just yet, but we'll revisit our review process when someone is named in his place.

Benz: Thank you so much for being here both of you for breaking this down for us. Big funds, investors have a lot of dollars invested in them. It's good to have some clear thinking on what's going on. Thank you for being here.

Zink: Thanks for having us.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.