I very rarely write about mutual funds for two reasons:
(1) Normally, the kinds of companies that are stuffed in mutual funds (Johnson & Johnson, Wells Fargo, Chevron, Procter & Gamble) are the kinds of companies that I believe I have the ability to identify on my own, and
(2) I do not like the concept of giving someone else a permanent asset override on what I own. If you have a $300,000 common stock portfolio that someone else is managing for a 1% fee, you are paying them $3,000 each year ($250 per month) for the privilege of handling your money. That figure will only go up as your assets increase. Why voluntarily give up that kind of wealth from the offset if you don’t have to?
With that said, there are some good mutual funds out there, and I’d like to highlight one of them in particular: The Vanguard Wellington Fund. What Leonardo Da Vinci’s The Last Supper is to art, the Vanguard Wellington Fund is to the mutual fund world.
Since its inception on January 1st, 1929, the Vanguard Wellington Fund has returned 8.23% annually. If your granddaddy had the foresight to buy $10,000 worth of it during The Great Depression and pass it along to his favorite grandchild (read: you), you’d have $10.2 million today. With a current dividend yield of 2.37%, you’d be collecting over $241,000 in annual dividend income. That would allow you to make $662 every day that you wake up in the morning. Talk about making your money work for you.
Okay, now for a more realistic example—over the past decade, The Wellington Fund has returned 8.19% annually. In order to invest in most Vanguard funds, you need to make a $3,000 minimum investment. From there, you can usually invest in $100 increments.
Let’s pretend that you put $3,000 into The Vanguard Wellington Fund at the start of the summer in 2003, and contributed $300 per month to the fund thereafter. Essentially, you are looking at $3,600 worth of annual investments for 10 years plus an initial $3,000 pop. How would the past ten years have treated you? You would have $71,200 paying out $1,687 in annual dividends. That is about $4.62 for working up in the morning.
Interestingly enough, that 2.37% yield is at a low point because The Wellington Fund is a “balanced fund” meaning that it holds a combination of stocks and bonds. According to its charter, there are very few circumstances that would allow for the fund’s composition to contain less than 30% stocks or 30% bonds at a given point in time.
Right now, bond rates are at the lowest they have been in the history of Ibottson & Associates’ data going back to 1926. In preparation for rising interest rates, The Vanguard Wellington Fund’s management team is shrewdly keeping the duration of its bond funds short, with the portfolio average being around only five years. While this is a shrewd move on a forward-looking basis, the one drawback is the fact that roughly 30% of the fund is “dead money” being kept in bonds paying out 1-2% in annual interest. That is why the current yield is at a historically low 2.37% rate. When interest rates rise, the yield of the Wellington Fund should increase meaningfully.
What I love about this fund is its style. Everything about it is high quality. It owns top-notch bonds, predominantly in the United States and in countries with top credit ratings like Switzerland and Germany.
And the stocks that the fund holds are among some of the best in the world. Just look at some of its top holdings. Wells Fargo. Exxon Mobil. IBM. Procter & Gamble. Johnson & Johnson. Walt Disney. Chevron. General Electric. Philip Morris International. Coca-Cola. Pepsi.
That is why I like this fund: it is not just the fact that it gets you a reliable 8% return, but rather, the fact that it is filled with the highest quality bonds and highest quality common stocks on the planet. The Wellington Fund looks like it was designed for an affluent elderly widow that ordered the trust officer to create a portfolio that could generate torrents of profit even in a Great Depression scenario.
This fund is quality, quality, quality. Is it any surprise to you that it has survived and thrived since 1929?
And the fund only charges a 0.25% fee, compared to an industry average of 1.26%. John Bogle did the middle-class and professional class a tremendous favor by founding The Vanguard Group and stuffing it with high-quality funds that folks can access at a low price.
Because the Wellington Fund has such a high bond allocation (usually, it is between 40-60%, but because of the record-low interest rates, the current bond allocation is only around 30%), the share price volatility is much less than that of the stock market at large, and this fund could be a useful addition to the portfolio of folks who like to participate in stock-like gains but don’t like to see their paper wealth fall by 50% during a recession.
The Vanguard Wellington Fund would be an ideal holding if you were creating a trust fund of some sort or intending to gift an asset to someone who does not have the ability to deal with money. You see this show up a lot with self-made businessmen who make millions but have children that do not understand a thing about money or long-term investing.
If you were engaging in estate planning for such an individual, what you would want to do is buy a block of shares in the Wellington Fund and instruct the trust officer to never sell the holdings and instead send the dividend and interest income to your heirs as it becomes available quarterly.
If you wanted to provide for your children after your death, but had the simultaneous fear that they would squander the money, the Vanguard Wellington Fund could be a useful permanent holding as part of a restricted trust that would allow your heirs to receive perpetual income every ninety days without allowing them to destroy the wealth it took you decades to build.