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    Portfolio Anchor

    This new Vanguard bond fund is designed to be the centerpiece of portfolios. Low fees are a bonus.

    Tom Lauricella, 10/12/2016

    In every issue, Undiscovered Manager profiles a manager on the Morningstar Manager Prospects list, which is compiled by Morningstar’s manager research group.

    Investors weighing a Vanguard bond fund to anchor their portfolios may instinctually head in the direction of its big, broad-based index funds. But Vanguard’s newest core bond offering is actively run, and its team of veteran, inhouse portfolio managers make clear they are out to beat the index.

    In late March, Vanguard opened the doors on its Vanguard Core Bond Fund VCORX, a strategy that aims to top the Barclays U.S. Aggregate Index. It’s a high-quality bond fund that can range between U.S. Treasurys and mortgage-backed U.S. and foreign corporate debt.

    Vanguard Core Bond has a two-pronged strategy for beating the index: structural and strategic.

    Structurally, the fund gains a significant tailwind in the form of its extremely low 0.25% expense ratio on the investor class shares. That expense ratio clocks in at less than one-third the average fee charged by intermediate-term bond funds.

    On the strategic side of the fence, the portfolio aimed at beating the benchmark is built through what Vanguard calls its “hub and satellite” approach.

    The hub—composed of its senior fixed-income investment strategy group—makes the big picture macro and market segment calls. Those are then translated into more granular asset allocations at the rate and credit team levels. Then the “satellite” specialist teams do the bottom-up research and make the buy-and-sell decisions on individual securities.

    “The portfolio is very dynamically managed,” says Gregory Nassour, who co-heads Vanguard’s investment-grade credit group and is one of the managers on the Core Bond fund. “Changes do happen and they happen often.”

    Tom Lauricella is the editor of Morningstar Direct.