A Consistently Strong Risk/Reward Profile Brings an Upgrade
Vanguard High Yield Dividend Index VHYAX had its Process Pillar upgraded to High from Above Average. The strategy delivers a competitive current yield while sporting strong fundamentals, and the resulting portfolio’s consistently strong risk/reward profile underpinned the Process Pillar upgrade as well as the share class’ Morningstar Medalist Rating upgrade to Gold from Silver.
The fund tracks the FTSE High Dividend Yield Index, which captures the highest-yielding half of the large- and mid-cap dividend-paying stock universe. The index starts with the FTSE USA Index and ranks its constituents by their projected 12-month yield. As it aims for 50% market-cap coverage of this cohort, the fund tends to own about 400 to 450 stocks. Companies that have not paid dividends in the past 12 months are not eligible. Historically, its trailing 12-month dividend yield has been about 1 percentage point higher than that of the Morningstar US Large-Mid Cap Broad Value Index.
The index implements buffer rules at its semiannual reconstitution. Current holdings will stay in the index until their yield falls below the 55th percentile, while new entrants can only be added after their yield passes the 45th percentile. This has helped keep a lid on turnover: The fund’s 9% turnover ratio came in about 50 percentage points lower than its average peer in 2022.
A Deep Team Manages This Mortgage-Focused Fund
JPMorgan Government Bond’s HLGAX seasoned managers and vast supporting cast underlie its People rating upgrade to High from Above Average. With this People Pillar upgrade, the fund’s institutional share class now has a Medalist Rating of Gold, up from Bronze. The more expensive A shares increased to Bronze from Neutral.
Comanagers Michael Sais and Bob Manning each bring over three decades of experience, but they don’t do it alone. A deep supporting lineup of managers, research analysts, and traders support them. They consistently execute this straightforward approach that only invests in U.S.-government-backed debt, but their expertise in sourcing and selecting various agency mortgage-backed securities structures stands out. Alongside the managers, a seven-person dedicated securitized analyst team helps with bottom-up research.
Stringent security selection and stable duration highlight the fund’s approach, while its Bloomberg U.S. Government Bond Index bogy, which only features U.S. Treasuries and agency debt, is just a loose proxy. Instead, the fund features agency MBS of various structures designed to offer an attractive yield and stable duration profile, limiting extension in periods of rising yields. While the process considers macro themes, bottom-up security selection drives portfolio construction. Agency-backed residential and commercial MBS and collateralized mortgage obligations typically comprise 45%-65% of assets, while U.S. Treasuries (15%-30%) and agencies (3%-20%) take a supporting role.
Waning Conviction Results in Downgrades on Two Funds
Eroding confidence in the teams managing Virtus Vontobel Foreign Opportunities JVXIX and Virtus Vontobel Emerging Markets Opportunities HIEMX resulted in People Pillar downgrades to Average from Above Average for both funds. As a result, both funds’ given share classes also saw a Medalist Rating decline to Neutral from Bronze. The team is experienced and uses a distinctive approach, but that hasn’t translated into a durable edge in the competitive quality growth investing space.
Matthew Benkendorf took the reins of this group after the departure of longtime manager Rajiv Jain in 2016. He has kept the strategy essentially intact while introducing a more collegial and inclusive approach, including a revised incentive structure, the appointment of a director of research to coordinate analysts’ work, and the promotion of several long-standing members to portfolio manager.
The Process rating for both funds remains Above Average because the investment process underlying them remains distinctive and repeatable. It consistently targets high-quality companies with steady, dependable growth, durable competitive advantages, sound accounting practices, and low to moderate leverage. The teams aim for multiyear holding periods, favoring firms with low volatility of earnings and relatively predictable profitability patterns, screening out many firms or industries that do not qualify for the steep quality criteria adopted.
