Vanguard TIPS Fund Portfolio Changes

I return to one of my favorite topics: TIPS. For new readers, TIPS are Treasury Inflation Protected Securities. They are a type of bond which pays interest indexed to inflation. In a previous post, Individual TIPS Or TIPS Mutual Fund, I said it’s a good idea to buy TIPS in a mutual fund and that buying individual TIPS is like becoming an amateur manager for your own bond fund.

The real yields on TIPS bonds bounced around quite a bit in the fourth quarter of 2008: reaching a peak in October, falling back down at the end of the year.

The longer term TIPS became very attractive in October 2008, relative to the historical real returns on bonds. I was tempted to buy more TIPS and/or lock in the good yield for longer time by selling my shorter term TIPS bonds for longer term TIPS bonds.

An amateur like me thinks that’s the best thing to do. What about the professional bond fund managers? Did they also see the longer term bonds as a good buying opportunity?

Vanguard has a TIPS fund: Vanguard Inflation Protected Securities Fund (VIPSX and VAIPX). They report their portfolio holdings four times a year, after the end of each quarter. The latest holdings are on their web site. I tracked down the quarterly holdings in 2008 from the reports they filed with the SEC.

There were only fewer than 30 TIPS bonds ever issued. The Vanguard fund owned about 25. The small number of holdings makes it easy to compare the portfolio changes from one quarter to the next. Because market prices fluctuate, I compared the changes in the face amount, which reflect the fund managers’ buying and selling activities.

Q1 2008 Q2 2008 Q3 2008 Q4 2008
Number of bonds held 24 23 24 23
New position 2 0 1 0
Added to position 18 11 11 9
Reduced from position 3 5 4 10
Position eliminated 1 1 0 1
Position unchanged 1 7 8 4

The fund’s holdings were not static. As investor bought or sold fund shares, the managers also bought and sold bonds. The managers also traded bonds for whatever reasons they saw fit. The trades were not proportional to all the holdings. They bought and sold some bonds but left alone some other bonds. However, at a high level, the managers kept the portfolio relatively stable. Here’s a breakdown of the fund’s positions by maturity:

The seemingly big change between Q2 and Q3 in percentages invested in bonds maturing less than five years and 5-10 years is primarily due to how a bond maturing in July 2013 is classified. It was 5 – 10 years in Q2 and it dropped down to less than five years in Q3. If we ignore that change on the boundary, we can say that the fund’s portfolio didn’t change much in 2008.

This exercise shows that the professional managers for the Vanguard TIPS fund didn’t go crazy on long term TIPS in Q4 2008. They either didn’t see the higher yields as a buying opportunity or they chose not to take advantage of it.

Although the Vanguard TIPS fund is not an index fund, it behaves like an index fund. If you invest in the fund, you are pretty much investing in substantially all the bonds in the market. The fund managers do not pick the “best” bonds. Nor do they time the market by shifting maturities materially. They do some trading, but not much.

It’s hard to say whether this kind of inaction is good or bad. On one hand, you may be disappointed if you buy the fund hoping the managers will chase the “sweet spots” wherever they may be at any point of time. On the other hand, if you attempt to chase the best values yourself with individual bonds, you may fare even worse. After all, the managers are veteran professionals. They know what they are doing.

Investment Manager Biographies

John Hollyer, CFA, Principal

  • Portfolio manager.
  • Advised the fund since 2000.
  • Worked in investment management since 1987.
  • B.S., University of Pennsylvania.

Kenneth E. Volpert, CFA, Principal, Head of Taxable Bond Group

  • Portfolio manager.
  • Advised the fund since 2000.
  • Worked in investment management since 1981.
  • B.S., University of Illinois.
  • M.B.A., University of Chicago.

If you care to see the raw data for the portfolio holdings, the spreadsheet is here:

Spreadsheet: Vanguard TIPS Fund Portfolio Changes 2008

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Comments

  1. Ray Yurick says

    Actually, for TIPS, the interest rate is not adjusted, rather the principal is adjusted to account for inflation. I-bonds have the adjustable interest rate. The principal amount on TIPS can be reduced in the case of deflation–that is why there was not much interest in TIPS at the end of 2008–the fear of deflation.

  2. Vincent Parziale says

    If interest rates rise what happens to the NAV of a TIPS mutual fund?

    I rececentl purchases a 20 year TIP with a coupon of 2.5 and YTM of about 2.35. The inflation factor was .99. Is it a good investment to hold on to or sell at this time since the value of the bond has risen?

  3. says

    Vincent – It can go either way. If interest rates rise purely because of inflation, the NAV of a TIPS mutual fund will stay flat but you will receive more in dividends (total return up). If interest rates rise but inflation doesn’t, the NAV of a TIPS mutual fund will go down.

  4. Richard Pflueger says

    Hello,
    Why is the share/unit price for VAIPX (Admiral Shares) versus VIPSX (Investor Shares) not the same, or almost the same since they are both the same fund?

    For example, in the Vanguard Total Stock Market Index Funds, VTSAX (Adm) and VTSMX (Inv) or 27.16 and 27.15, respectively. They are both the same fund with the only difference being in slightly lower expenses charged to the Admiral Shares.

    Thank you.

  5. says

    Richard – The absolute value of a mutual fund’s NAV is not very meaningful. If one fund has a lower NAV, you get more shares for the same amount of money. See previous post.

    When a new fund or a new share class starts, the company can set the NAV to any arbitrary number and adjust the number of shares you get. It’s just math. VAIPX started in 2005. They started the NAV at about $25. At that time, VIPSX’s NAV is about $12.50. VTSAX started in 2000. They started the NAV at the same as that for VTSMX at the time.

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