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A Downgrade for This Vanguard Bond Fund

Among the largest in the intermediate government category, Vanguard GNMA will soon lose its longtime manager.


The following is our latest Fund Analyst Report for Vanguard GNMA (VFIJX). Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Vanguard GNMA is losing an experienced contributor, but its thoughtful and risk-aware approach to the agency mortgage markets remains compelling. This is enough to award the strategy’s cheapest share class a Morningstar Analyst Rating of Silver, while its more expensive share class earns a Bronze rating. After two decades contributing to this Wellington-subadvised strategy, long-tenured lead manager Michael Garrett will retire in June 2020. In 2012, Garrett selected Brian Conroy, a former bond trader, as an agency mortgage analyst here; in mid-2019, Conroy was formally appointed to the portfolio management roster along with Joe Marvan, a senior fixed-income markets generalist at the firm. Though a structured finance analyst, two traders, and two quants are identified as further contributors here, relative to peers, this team is both thinly staffed and, without Garrett, a rather fresh configuration. The team employs a value-leaning approach and selects bonds that look cheap relative to their likely cash flows, primarily focusing on GNMA mortgage pass-throughs. Fannie Mae- and Freddie Mac-backed fare (around 16% of assets as of September 2019) function as modest out-of-benchmark allocations along the portfolio’s periphery. As of September 2019, roughly 75% of holdings were GNMA securities--around 10 percentage points lower than the year prior--as the team found more-attractive valuations in Fannie Mae- and Freddie Mac-backed fare. The strategy’s steadfastness has paid off over time. For instance, it performed comparatively well in 2008's risky credit markets, when some of its more adventurous peers fell behind. Over the 15-year period ended October 2019, the strategy’s investor share class delivered an annualized 4.0% and topped 85% of a subgroup of distinct mortgage-focused peers in its intermediate government Morningstar Category; it also kept pace with its Bloomberg Barclays U.S. GNMA Bond Index. Of note here, rock-bottom fees translate to a persistent edge relative to peers that must clear a higher performance hurdle.

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Emory Zink does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.