Chang: The high-yield team at Vanguard seeks to generate outperformance through three primary strategies: first, by having a structural higher-quality bias; second, through issuer diversification; and third, via our bottom-up security selection process. If you look at it empirically, this three-pronged approach is a time-tested way to potentially outperform over the long term.
In the fixed income space—the high-yield segment included—the ability to be up in quality is a real advantage. Fixed income risks are asymmetric, usually with much more downside than upside. So, our advantage is tied to our low fee structure, which allows us to be more patient and disciplined about selecting high-quality issues, particularly when spreads are tight relative to our competitors.
We have a collaborative, world-class team that we’ve built from the ground up, attracting high-caliber people from other world-class institutions and from within our own ranks here at Vanguard. We’ve grown from a team of four in 2017 to 13 team members today. The combination of our deeply knowledgeable team and collaborative process gives us the ability to be nimble and opportunistic, even during less-attractive market conditions.
Our team’s diversity of experience helps with security selection but, when spreads are tight, you can’t outperform with beta. Similarly, when dispersion is low, it doesn’t matter if you have a strong team. In the current environment, when dispersion is high but spreads are tight, we’re able to play to our strengths. We can practice patience and wait for better entry points but can also take advantage of our team’s experience to identify the winners.
Finally, our portfolios are true-to-label. You know what you’re getting. Our benchmark construction allows us to show investors which asset classes they will be invested in, most of the time.
It’s also worth mentioning that Vanguard has invested a lot in building out its high-yield business. We’re here for the long term. We see a lot of attractive opportunity for active managers within high-yield.