How this $50B Vanguard manager found winners in bond-market chaos

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One of the worst-ever bouts of dislocation in the U.S. bond market generated some winning trades for Vanguard’s Gemma Wright-Casparius.

As liquidity disappeared amid the pandemic-sparked mayhem in March, the veteran fixed-income portfolio manager saw opportunities, including in older, less-traded Treasurys. The market for these securities had all but vanished after a popular trade that exploits price differences between cash Treasurys and futures blew up.

For Wright-Casparius, the sole head of four actively managed mutual funds with combined assets of about $50 billion, the undervalued securities presented a bargain. As she and a handful of senior colleagues continued to work on the firm’s trading desk in Malvern, Pennsylvania, Wright-Casparius also deemed that inflation expectations had become too dire and increased mortgage-debt holdings. Things soon got so desperate for the bond market that the Fed stepped in to support it.

Her wagers have paid off, with several of her funds beating most of their peers in 2020. Now, the portfolio manager, who’s been in finance for about 40 years, envisions a long road to economic revival as the nation endures the steepest levels of joblessness since the Great Depression.

“The market gave you some lemons early in March, and we tried to capitalize on that,” Wright-Casparius said in an interview. Going forward, “there’s still a lot of unanswered questions, especially regarding consumer behavior, so the economic recovery should be slow and gradual.”

SELECT UNIVERSE
The $7.2 billion Vanguard Intermediate-Term Treasury Fund (VGIT), among the four she runs on her own, has returned 7.2% this year — beating 89% of its peers, according to data compiled by Bloomberg. Her $9.2 billion Short-Term Treasury Fund (VFISX) is outpacing 90% of rivals.

It is part of a select universe of just 31 U.S. fixed-income mutual funds and ETFs tracked by Morningstar that were run exclusively by women as of May 1. That tally, helmed by 27 women, is out of more than 2,500 fixed-income funds, with over 2,200 managers, followed by Morningstar. For taxable funds alone, the list shrinks to 16 women.

Vanguard’s downbeat view toward the U.S. growth trajectory is shared by several market veterans and Fed officials.
Vanguard’s downbeat view toward the U.S. growth trajectory is shared by several market veterans and Fed officials.

For women in asset management, progress has been slow, despite widespread focus on the importance of diversity. Even passive funds, a booming area of money management that was once a hot-spot for female talent, have seen the percentage of women managers drop over the past decade.
Still, Wright-Casparius is positive on the prospects for women and is as excited about what she does as when she began her career. Before switching over to asset management, she worked at investment banks including Barclays, where she was director of fixed-income research. She joined Vanguard in 2011.

The two largest holdings in Wright-Casparius’s Intermediate-Term fund as of March 31 were a 0.63% coupon inflation-linked Treasury and a 2.88% coupon regular Treasury, both of which were originally issued in 2018 and mature in 2023, data compiled by Bloomberg show. The fund purchased the former last quarter and added to the latter position during the period, according to the data.

Older securities — known as off-the-runs — are tougher to trade even under normal conditions, and were hit hardest by the evaporation of liquidity in March. A blow-up of basis trades — which exploit price differences between cash Treasurys and futures — helped stoke the turmoil. That left some off-the-run prices too depressed relative to benchmarks, according to the Vanguard team.

“The volatility in March was breathtaking,” she said. “While part of my management is taking a very long term view, we had dislocations in the Treasury market space and we took advantage.”

‘ACCOMMODATIVE FOR YEARS’
The world’s biggest economy will merely hobble back as states and businesses gradually reopen, requiring years of monetary support, in the estimate of Wright-Casparius and her colleagues at the $5.3 trillion asset manager.

They see the benchmark 10-year Treasury yield bumping around in a range and slowly gliding higher to about 1%, from around 0.7% now. But that level will only be attained by late-2021, when growth finally returns to pre-virus levels and inflation rebounds above the Fed’s 2% target, Wright-Casparius says. Increased government borrowing will help boost long-term yields, said the Queens, New York, native.

Many of the executives selected this year say the industry’s future may lie in its sudden change to a fully virtual business model.
May 1

The move toward a steeper yield curve — the gap between 2- and 10-year rates has expanded to about 50 basis points from just above 30 at the start of the year — will gradually gain momentum, she adds.

“Initially, we see the curve and rates range-bound — and then toward the recovery phase we are looking for slightly higher yields and slightly steeper curve,” she said.

Vanguard’s downbeat view toward the U.S. growth trajectory is shared by several market veterans and Fed officials. Fed Chairman Jerome Powell says the economy faces unprecedented downside risks that could do lasting damage to households and businesses. The recovery process could stretch through until the end of next year and depend on the delivery of a vaccine, according to Powell.

The central bank has cut rates to near zero and ramped up Treasury purchases to calm markets. It’s also been buying debt in other asset classes, ballooning its balance sheet by more than $2.5 trillion this year.

“The Fed will be accommodative for years,” Wright-Casparius said.

Bloomberg News
Active management Asset managers Mutual funds Bond funds Diversity and equality Treasurys Money Management Executive Vanguard Fund performance Coronavirus
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