How would you describe the role of the credit research teams?
Cunniffe: Our job as analysts is to do deep fundamental and market research on issuers and make recommendations to portfolio managers on which investments could generate the best risk-adjusted returns.
Will: On the municipal side, we also seek to generate the best risk-adjusted returns, taking into account that investors in Vanguard’s municipal funds are seeking interest that is exempt from federal and, in certain cases, state and local income taxes.
What makes Vanguard’s approach to credit research different?
Cunniffe: Credit research at Vanguard is a career destination in and of itself. Our focus on developing and honing credit research skills is reflected in our deep bench of tenured analysts.
Our team of nearly 50 analysts has, on average, more than 15 years of experience. Some of our analysts have covered the same industries for their entire careers, so they know those management teams, how they think about their businesses, how they treat creditors. They have deep relationships they can leverage.
More important—they’ve seen multiple market and economic cycles. They won’t have the deer-in-the-headlights reaction of analysts seeing their securities plummet for the first time. It takes time to learn to navigate market cycles.
Will: I would echo a lot of those sentiments for our team of 22 analysts on the tax-exempt side. With more than 50,000 issuers in the municipal market to evaluate, it is critical to have a long-tenured team with broad and deep experience.
We’re also different in how we operate. A more traditional view of credit research may be that credit analysts perform their analysis, assign ratings, and hand them off to traders and portfolio managers to execute. That’s not the case here. Credit isn’t siloed from the rest of the desk; rather, it’s a key partner in investment decision-making.
Cunniffe: Research is not a back-office function here. We’re deeply integrated, and it’s a very iterative investment process. Lots of conversation on an hourly, daily, weekly basis.
Are there differences in operations between the taxable and municipal credit research teams?
Cunniffe: The investing universes we work in are different, but our goals are the same—to generate the best risk-adjusted returns for our investors, to partner with the portfolio managers and traders, and to ensure that the best investment ideas are implemented in the portfolios.
Will: In fact, the taxable and muni sides are not only highly integrated with their respective desks, they also are extremely collaborative across the different asset classes. I covered corporate-backed munis for years.1 These can include airlines issuing billions in tax-exempt debt to build and improve infrastructure at airports, or investor-owned utilities issuing bonds to develop and upgrade power plants.
Cunniffe: It goes to the strength of Vanguard’s approach to credit research. We all sit on the same trading floor. We can tap into significant knowledge bases on both teams to help get the best results for our clients. We once had to do research on a new corporate issuer that had previously financed a new fertilizer plant using tax-exempt debt, so we were able to leverage the muni team’s extensive experience with and knowledge of the unique credit aspects of this particular conglomerate.
Will: It definitely goes both ways. It’s a huge advantage for us to just be able to walk across the floor and grab one of the foremost experts on a particular corporate credit. It’s been a great partnership developed over many years of working together.
Cunniffe: There’s a lot of crossover here. The teams can leverage each other to generate better investment recommendations.
2025 is already a volatile year for the financial markets, with many other variables in flux, from tariffs to taxes. Does that affect how the credit research teams make their recommendations?
Cunniffe: We’re long-term investors but we pay attention to day-to-day markets, to find opportunities or to make sure we’re adequately compensated for the risk we’re taking. But there’s a lot of noise. That’s why it’s so important to have senior analysts who can navigate through that noise and focus on what’s important. We do look at the “bookends” of possible outcomes, the best- and worst-case scenarios, to inform our investment decisions.
Will: Of course, munis can be susceptible to the macro environment and policy issues as well. Headlines can generate a lot of concern but, as Colleen points out, are often simply noise. Our experience allows us to remain focused on fundamentals and make investment recommendations that provide the best opportunity for long-term value.
That value is enabled by three factors—experience to cut through the noise, integration between the analysts and the portfolio managers and traders, and collaboration between the muni and taxable teams.
1 Corporate-backed munis are tax-exempt bonds issued by corporations under applicable IRS regulations.
Notes:
For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss.
Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.
Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund’s trading or through your own redemption of shares. For some investors, a portion of the fund’s income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.
This document is not intended to provide tax advice or make and exhaustive analysis of the tax regime of the securities described herein. We strongly recommend seeking professional tax advice from a tax specialist.