When considering mutual fund investments, investors often overlook the tactical advantages of currency risk-hedging and defensive strategies. In our increasingly global economy, traditional income growth and preservation plans may not be enough to achieve portfolio goals. Global exposure should provide diversification without posing excessive currency-related risk. The Vanguard Global Minimum Volatility Fund (VMVFX) offers its investors a global portfolio of stocks while minimizing foreign currency exposure through currency hedging.
From the end of June 2014 through July 31, 2016, VMVFX gained 21 percent versus the U.S. Dollar Index’s 20 percent. Over the same period, Vanguard Global Equity (VHGEX), which does not hedge currency exposure, gained only 2 percent. The outperformance in VMVFX over this period was largely a function of its currency exposure.
Conversely, the U.S. Dollar Index has fallen 3 percent since March 30, 2015, while VMVFX has gained 8 percent and VHGEX has gained 6 percent. If VMVFX utilized currency hedging as its sole strategy, it would have underperformed VHGEX. Instead, its minimum volatility approach generated market-beating results that more than made up for the currency drag.
Europe, Japan and China are currently in monetary easing cycles. Post-2008 domestic regulations designed to protect the financial system have also limited money market funds as investors move out of privately issued short-term debt paper and into short-term U.S. Treasury paper to circumvent the new rules. The concurrent quantitative easing policies of central bankers are squeezing privately issued prime funds and fueling government bonds. VMVFX is designed to perform with relative stability as international currencies fluctuate.
Strategy
The Vanguard Global Minimum Volatility Fund aims to achieve broad global stock exposure while simultaneously mitigating the price volatility of global stock market indexes. The fund utilizes structured mathematical algorithms to determine its selections for portfolio allocation. The calculations must meet reduced volatility parameters and correlate the prospective stocks to ensure minimization of overexposure to any particular industrial sectors, regions or relationships between companies that could affect volatility. The formula then applies appropriate Forex futures hedging strategies to eliminate foreign currency risk.
Initial criteria include stocks from the FTSE Global All Cap Index that exhibit lower-than-average volatility. The selection process then continues to eliminate those stocks to within a 5 percent deviation from the parent index and calculates through the other parameters, with regard to position size, industrial sector, etc. As a result, roughly half the portfolio is U.S. domestic securities while the remainder comprises a wide range of foreign stocks that meet the low-volatility criteria.
VMVFX is categorized as a “world stock fund” and has $1.6 billion AUM as of the end of the second quarter of 2016. Its portfolio has 392 different holdings with a brisk 57.3 percent turnover rate and is relatively new, having been founded in December 2013. The current dividend yield is 1.65 percent, and dividends and capital gains distributions are paid annually. The largest sectors that VMVFX holds positions in are, unsurprisingly, consumer defensive, industrials, and healthcare, all of which are historically lower beta. Overall portfolio composition is 38.7 percent medium/small cap, 22.3 percent small cap, 19.1 percent medium cap, 13 percent medium/large cap, and 6.9 percent large cap. Emerging markets make up 8.5 percent of holdings.
The fund’s top 10 holdings reflect its strategy of global diversity. Among its foreign holdings are CLP Holdings Ltd., a utilities company traded on the Hong Kong Stock Exchange; BCE Inc. (BCE), a Canadian telecom company; and Taiwan Semiconductor (TSM-ADR). Household U.S. corporates round out the top 10, with Johnson & Johnson (JNJ), Church & Dwight (CHD), data processing company Jack Henry & Associates (JKHY), Clorox (NYSE: CLX), reinsurer RenaissanceRe Holdings (RNR), Spectrum Brands (SPB) and Kaiser Aluminum (KALU).
Performance
In its relatively short two-and-a-half-year lifespan, VMVFX has an annual average return of 12.03 percent. When compared with the FTSE Global All Cap Index during the same period, VMVFX has demonstrated less than 65 percent of comparable volatility, meeting its mandated strategy goals. At the same time, the strong U.S. dollar and application of Forex hedging protocols, a technique not widely deployed by other World Stock fund rivals, have boosted performance of VMVFX.
The current dividend yield is 1.65 percent.
Management & Fees
The team members managing VMVFX all have a heavy quantitative analytic background – not a surprise given the platform’s reliance on quantitative screens and algorithms. Lead manager Michael Roach has been with Vanguard for two decades and has been the lead manager for VMVFX since its inception. Binbin Guo, PhD, is the head of equity research and portfolio strategies for Vanguard’s Quantitative Equity Group. Anatoly Shtekhman is the junior manager, having just been promoted to a management position this year. Guo and Shtekhman joined VMVFX in February 2016, replacing James Stetler and James Troye.
Popular for its low fees, VMVFX charges a fee of 0.27 percent with a minimum investment of $3,000. Admiral shares (VMNVX) are also available for a slightly lower 0.21 percent fee and a $50,000 minimum investment. Both options are far below the 1.15 percent median average for other World Stock funds.
Conclusion
VMVFX offers global stock exposure while aiming for lower portfolio volatility.
The fund may be especially suitable for those in the five-year holding period range that roughly mirrors the length of U.S. dollar bull and bear markets. Investors who shift international exposure based on U.S. dollar cycles will get the most mileage out of this fund. Currently, we have ranked the fund as a Strong Buy with a ranking of 98.
