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Bank closures, market volatility call for perspective

Amid sudden bank closures, we explain our risk management approach and remind investors to focus on what they can control.

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Recent financial market volatility has been widely attributed to a pair of U.S. regional bank closures and to speculation that central banks including the Reserve Bank of Australia and the U.S. Federal Reserve may respond in part by easing campaigns to tighten monetary policy. At Vanguard, we continue to encourage investors to avoid speculation and trading on emotion, and to focus instead on the long term and factors within their control.

Here we provide background on recent events, note the extent of Vanguard Australia funds’ investments in the shuttered banks, explain what happens when a security drops from an index, and summarise our approach to risk management.

Key points

  • Vanguard is committed to prudently stewarding client assets. Fund portfolio managers will make adjustments within our index and active funds, as necessary and in pursuit of our investors’ long-term interests.
  • Risk management is central to investment management. Whether managed by our internal investment teams or external advisory firms, all Vanguard funds are subject to rigorous risk oversight and analysis.
  • Investors should take a long-term view. As explained in Vanguard's principles for investing success, investors are well-served by a long-term outlook, perspective, and discipline.

Background

Driven by strong deposit growth, Silicon Valley Bank doubled in size in 2021 and primarily invested those deposits in longer-duration U.S. Treasuries and mortgage-backed securities. As interest rates climbed, the securities fell in value, and the bank was forced to sell some at lower prices amid customer withdrawals. Loss-making investment sales triggered more withdrawals by clients of the bank, which catered to technology startups and venture-capital firms. Silicon Valley Bank announced sizable losses on 8 March, and its shares subsequently declined rapidly. On 10 March, regulators halted trading in shares of SVB Financial Group (NYSE:SIVB), the bank’s parent company, and closed the bank to protect depositors.

On 12 March, New York-based Signature Bank (NYSE:SBNY) was also shut down by regulators and placed into FDIC receivership. Later that day, U.S. Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome Powell, and Federal Deposit Insurance Corporation Chairman Martin Gruenberg approved actions to enable the FDIC to complete its resolution of Silicon Valley Bank and Signature Bank in a manner that fully protects all depositors, both insured and uninsured.

Exposure of Vanguard funds to the shuttered banks

On behalf of their investors, certain Vanguard Australia index funds with exposure to U.S. equities owned securities issued by both banks. As at 28 February 2023, the exposure to SVB in these funds is 0.04% or lower, and for Signature Bank it is 0.02% or lower.1

Indexes, index funds, and the shuttered banks

Index providers such as S&P Dow Jones, FTSE, MSCI, and Bloomberg determine the securities in each index or benchmark. Standard & Poor’s, for example, announced the deletion of SVB Financial Group from its indexes effective at the close of trading 14 March.

Index funds and exchange-traded funds (ETFs) seek to track their benchmarks by replicating the risk and/or exposures of those benchmarks in their portfolios. As a result, Vanguard index funds own many securities in line with their benchmark weights. Equity and fixed income index inclusion criteria differ by provider, but once a security no longer meets those criteria, it will fall out of the provider’s index. Securities removed from indexes are then removed from Vanguard index funds.

How Vanguard manages investment risk

All Vanguard funds, whether managed by Vanguard’s internal investment teams or one of our external advisory firms, are subject to rigorous risk oversight and analysis. Each fund has documented investment objectives and strategies, a benchmark against which its composition and performance are assessed, and documentation of permitted instruments and risk limits.

Our risk management efforts do not preclude losses—investing inherently entails risk of loss—but they are central to our investment process. Our seasoned risk managers:

  • apply independent judgment and expertise to help our investment teams assess and mitigate risk;
  • ensure risk and return transparency by monitoring and analysing investment management activities and reporting on Vanguard funds; and
  • participate in research that continuously improves our understanding of risk and expected return.

Importantly, our risk managers operate independently from our investment managers and analysts, reporting directly to our chief risk officer.

What investors can and should do

Unexpected and fast-moving economic or financial market news can be disquieting. In most cases, however, Vanguard believes that investors benefit in the long run by sticking with well-considered financial plans and portfolios.

In particular, we believe investors should focus on:

  • aligning their asset allocations with their risk tolerance;
  • controlling costs;
  • adopting realistic expectations;
  • holding broadly diversified funds; and
  • maintaining discipline.

In general, investors should change their portfolios only when there are meaningful shifts in their investment horizons, goals, or financial circumstances, and not in response to short-term market conditions or performance. Investors who work with a financial advisor may want to speak with them for personalised advice.

[1] The holdings of most Vanguard Australia funds as at the end of any given month are updated on our websites around the middle of the following month. An exception applies to certain of our ETFs, which publish Pricing Baskets daily.

 

 

By Vanguard
vanguard.com.au


David Forrest Download David's Advisor Profile

David Forrest

Director
BEc (Acc), MBA, CPA, FFin

David has been in the Financial Services Industry for nearly 30 years. He was one of the founding Directors of the successful Financial Planning and Stockbroking Practice, Henderson Gregory Forrest, for a decade. Prior to that, he held senior roles in companies such as ING, KPMG Accountants and AMP. David was previously Chairman of OAMPS Superannuation Trustee Board and currently serves as an independent Board Director for several companies.

David’s extensive experience in all forms of superannuation, including Self Managed Super Funds (SMSF), Defined Benefit Funds, retirement funding through Account Based Pensions, stockbroking with a focus on Direct Share Investment, Taxation/Remuneration Planning, Centrelink, Aged Care and business management, equip him to advise expertly on all aspects of Financial Advice.

Those with a particular interest in superannuation/SMSFs, direct share investment, salary packaging or applying for the Centrelink Pension will find his knowledge and ability in formulating and implementing creative, logical and simple wealth creation strategies a valuable asset.

David maintains a strong personalised client service focus, providing tailored solutions for clients.

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David Forrest is an Authorised Representative of Integrity Financial (SA) Pty Ltd ABN 16 133 921 187 — AFSL No 334846

Michelle Forrest

Michelle Forrest

Business Finance Manager
B Bus (Acc), CPA

Michelle’s career has spanned across the Financial Services, Retirement Living and Aged Care industries working in the private sector, not for profit and more recently with the state government for over 20 years. Her experience extends to many facets of the financial services industry, having worked in superannuation administration, technical support and financial planning practice administration.

Commencing with AMP and subsequently working in commerce and accounting roles with companies such as Brambles, Adelaide Bank Retirement Services, ECH Inc and SA Health and Wellbeing, Michelle returns to financial services after working in practice financial management at Henderson Gregory Forrest. This wide range of experience from senior accounting and management roles has provided Michelle with a strong background in business administration.

With an astute financial acumen and keen interest in business improvement strategies, Michelle ensures the smooth running of the Integrity Financial Advisory practice providing valued management support to our personalised client service focus.

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Darren Chalk
Natasha Bartlett
Kelly Collins
Jasmine Smith

Jasmine Smith

Client Service Manager

Jasmine has worked in the financial services industry for over 12 years in all areas of client administration, working with David since 2013.

Jasmine has extensive knowledge and experience in client service including implementation of advice, portfolio reporting, assisting with the establishment of Self Managed Super Funds (SMSFs), term deposit management and a long history of helping clients with their enquiries.

Jasmine’s attention to detail, yet gentle approach, means she is able to solve the trickiest of questions for our client community.

Jasmine has gained her Certificate III in Financial Services qualification.

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Merrilyn Smith

Merrilyn Smith

Senior Client Service Manager

Merrilyn has worked in the financial services industry for over 11 years in all areas of client administration, and is a new addition to our client services team, returning from Melbourne to join the team in June 2019.

Merrilyn has extensive knowledge and experience in client service including implementation of advice, managed fund administration, assisting with the establishment of Self Managed Super Funds (SMSFs) and process improvement for the previous practices she has worked with. Merrilyn’s experience with direct shares constitutes the other part of our administrative support for direct equity investments.

Merrilyn’s warm and caring nature continues to endear her to our clients and she has already established herself as a valued member of our team.

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