Our process for evaluating new investment products

Vanguard is continually evaluating new investment products to meet the needs of our investors. Vanguard investing expert Matt Piro explains how our managers determine an investment case: Understanding the purpose of the prospective fund, the role we expect it to play in a client’s portfolio, and whether the fund’s investment strategy will stand the test of time. 

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Jon Cleborne: So, Matt, you and I both work in the group that oversees Vanguard’s new product development process, and we talked a little bit about some principles that guide our overarching investing philosophy. I wonder if maybe you could talk a little bit about when we think about launching new funds. For example, we launched a bond fund earlier this year. How do we think about incorporating those principles into the new product development process?

Matt Piro:It’s absolutely core to what we do. I mean as we’re evaluating new products that we’re going to bring out to offer to our clients, the conversation always begins with what we call the investment case, right. And what we mean by that is really understanding the purpose of the fund, the role we expect it to play in a client’s portfolio, whether the strategy that will be employed is enduring and is something that’ll stand the test of time. We are not proponents of bringing out kind of flavor of the day type products. We want these to be enduring strategies and products that our clients can use for the long term, which, of course, is one of our key principles. You know, Jon, you mentioned a new fund earlier this year, and I think the one you’re probably referencing is the Vanguard Core Bond Fund. And I think this is a great example of our principles in action in terms of structuring that fund. This is a fund that is designed to invest pretty much an investment-grade U.S. bond funds, get back to the role of bonds in a portfolio. Our research is very clear that it is investment-grade bonds that provide that ballast against the equity risk in your portfolio. So we very carefully evaluated how to structure this product and wanted to ensure that we invest in investment-grade bonds so that investors can use that fund, which is an actively managed fund. For those people who are tuning in tonight who know our Total Bond Market Index fund, think of it as an active version of that, so there is some active risk. But the role within the portfolio is very much the same. And we did that purposefully. And I think that’s really a great demonstration of our investment principles coming into play as we design a new fund that we brought out earlier this year.

Jon Cleborne: So one of the questions that we got a lot as we were looking through the questions that were submitted in advance was around gold. And, hey, why doesn’t Vanguard have a gold fund? And so maybe I’d be interested in your thoughts on just gold as an investment and then also, you know, why not have a gold fund?

Matt Piro:Right. I mean gold always attracts a lot of attention. It can be quite speculative. You can see the price of gold move up and down quite viciously, and I think it’s times where it’s moving up quite, that’s when you see a lot more interest. But there are some investors out there who think gold has a role in a portfolio, whether it’s something to do with inflation or safety. And that’s fine for those investors to have that perspective. It’s not necessarily our perspective. Tying back to the speculative point, we do worry about that with gold. And then just fundamentally speaking, as you try to think about how gold is valued, there’s no earnings, there’s no cash, there’s no income like a bond. So coming to a valuation of gold is very challenging. So there’s a lot of reasons we think it’s complicated and most investors are probably best served with not kind of investing there, though, again, some may think it’s appropriate. The other thing we see is some people look to have exposure indirectly to gold through gold equities. And there are some funds out there that give you exposure there. I think an important point to start is as we think about a diversified stock fund, you have exposure to build equities already. And in a market cap-weighted portfolio, gold equities are a part of that. So any decision to allocate more to gold equities strategies is an active decision to overweight that. And that can be tough because it’s a very volatile market. We talk about discipline, that stomach, during tough times. Well, a sector like that is as volatile as they come. And I think it’s very challenging for investors to really invest for the long term in that part of the market. So for those reasons, we’re cautious on the use of gold and we generally steer away from it, but, of course, recognizing others might have a different point of view, but that’s certainly our perspective on that.

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