Simple Credo, Fancy Results

Vanguard's Total Bond Market Portfolio aims to match the moves of the bond market while keeping costs low--much like its equity-fund cousin, the popular Vanguard Index 500. With nearly $5.5 billion in assets, the fund has outperformed 82% of intermediate bond funds over the past three years, according to Morningstar. BUSINESS WEEK Senior Writer Robert Barker spoke with manager Kenneth Volpert:

Q: Why are you beating your rivals?

A: The average expense ratio in the group is...106 basis points, vs. the fund, which is 20. [One basis point equals one hundredth of a percentage point.] So that's basically 85 basis points of value added just from the expense ratio


Q: Some active bond managers have steadily beaten the market. Why invest in a passive index fund rather than giving your money, say, to Pacific Investment Management Co.?

A: Well, if you feel pretty confident that [Pimco's high returns] will continue, O.K....But historical performance is not a good predictor of future performance. That's not to say Pimco won't continue to do well. Obviously, it's an excellent shop...but there are relatively few of those shops that have been able to do it year in and year out.

Q: Want to run an active fund?

A: No. I worked for an active manager from '81 to '86 and that drove me to the indexing business. I was dismayed with having so much of the bets driven by interest rates. What I started to believe in was multiple smaller bets. A lot of smaller bets. And for me, none of it is interest-rate related.

Q: Knowing bonds as you do, where's the biggest threat to investors?

A: Bonds of companies heavily involved in commodities from Asia or that make goods in competition with Asian companies I think are going to have a lot of pressure. Also, if our economy has a downturn, there's significant risk in high-yield [junk] bonds.

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