Asset Manager Overview
Vanguard is one of the world's largest managers of passive strategies. The organization is mutually owned by investors in its U.S. domiciled funds and has a policy of returning profits to its U.S. clients through lower charges. The UK and European arms of the business return any small profits made back to the U.S. arm, which ultimately distributes profits to the investors in the U.S. domiciled funds. Overall, we do not believe that UK and European investors are significantly disadvantaged by this policy; instead, they benefit from the expertise and technology of the wider Vanguard group.
Fund Manager/Team Overview
The equity and fixed income funds at Vanguard are managed by two separate teams, each with expertise in their respective asset classes. The fixed income team manages funds from three global locations to ensure 24-hour market access. They oversee over $1.5 trillion in assets with the support of more than 200 dedicated professionals.
Investment Philosophy & Process Overview
The fund invests in physical securities and adopts a stratified sampling approach. A stratified sampling approach is commonly used when tracking a bond index with a large number of constituents due to the high transaction costs involved in purchasing every bond in the index.
The fund managers start by identifying the main risks that drive the performance of the index, such as credit risk, interest rate risk, time to maturity, as well as sector, industry, and geographical exposure. This analysis is then used as a framework for selecting securities that will result in a fund with similar risk/return characteristics to the index. Investors should be aware that a stratified sampling approach will lead to a higher tracking error gross of fees compared to a full replication approach, but net of fees, the results are generally similar.
By employing stratified sampling, passive funds can achieve a balance between tracking accuracy and cost efficiency, providing investors with an effective way to gain exposure to the fund's benchmark while minimizing expenses and tracking error.
The fund's cut-off for dealing is midday, but the fund is not priced until 16:30. This eliminates the need to apply a fair value adjustment to align its price with that of the tracked index. We believe that this represents good practice for index funds, although investors should be aware of the short time delay in obtaining full exposure to the market as a result.
This approach is different from that of many of Vanguard's peers, and as a result, its tracking error may appear lower. This is simply a characteristic of the fund's structure. Over the long term, we don't believe that when a fund is priced will materially impact the performance of a fund.
This fund operates with a partial swing pricing policy, which means that units are typically bought and sold at the same price. However, the fund can apply a small spread if the daily inflow or outflow exceeds a certain threshold. This involves adding (in the case of inflows) or subtracting (in the case of outflows) the costs of creating or cancelling units in the fund. This means that incoming or exiting investors will bear these costs rather than the current investors. This spread is sometimes referred to as an anti-dilution levy and we consider this policy to be reasonable, as it protects the interests of investors who continue to hold the fund.
The fund does not undertake any stock lending activity.
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