After recently mentioning that I would consider an investment in the Vanguard Wellington Fund if I wanted to create wealth in such a way that I did not have to spend much time thinking about investments or intended to pass the ownership stake on to someone that did not have much knowledge about investing (i.e. if you wanted to turn your children into trust fund babies in a way that they could not ruin it, you’d want to set up a restricted trust that only permitted the kids to receive the interest and dividend income generated by the fund, perhaps with the instruction that the assets transfer into an S&P 500 index fund if the Wellington Fund were to ever cease to exist).
Anyway, when I wrote about it recently, some readers wanted to know if they were still allowed to contribute to the fund, given the fund’s press release on February 28th, 2013:
“Vanguard Group said on Thursday it would stop opening new accounts from financial advisers and institutional customers in its popular $68 billion Wellington Fund, which invests in a mix of stocks and bonds.”
If you are an individual investor looking to start your own $3,000 investment in the Wellington Fund, you may still do so. If you already have established a position in the Vanguard Wellington Fund and you are running, say, a pension, you may continue to add to the account. However, if you were setting up a workplace pension and did not already have a position in the Wellington Fund, then you may not do so. But for most of you, you should be fine getting started with the Wellington Fund if you have yet to start.
Why would the Wellington Fund choose to close the fund down to financial advisors and the big institutions? Most ostensibly, it’s a way to protect you, the small investor. Depending on the tallied stock prices of the day, there is a total value of roughly $70 billion in the Wellington Fund. If a pension manager deposits $2 billion into the fund, it puts pressure on the Wellington management team to deploy that money effectively. That $2 billion would then get spread across all the assets, and shape your future returns as well. Given that most companies today are trading at valuations well above their ten-year averages (i.e. investors usually pay $18-$22 for each dollar of profit that Hershey generates, but today they are willing to pay $26-$29). This moderately high pricing makes it difficult for the Wellington Fund management team to deploy large infusions of cash effectively, so they have banned investors with large resources from adding cash to the fund, which would likely lower the returns for other investors.
Personally, I don’t own the Wellington Fund. I much prefer individual stock picking because I believe I am able to pick the kinds of companies that the Wellington Fund holds such as Chevron, Wells Fargo, Pfizer, and Colgate-Palmolive, and given that belief, it makes sense for me to bypass the 0.25% asset override that the fund charges. However, I do think that the fund can serve its purpose well—if you want to own an asset, or pass on an asset, that requires little thought or attention, it’s a great asset to own. And the good news is that, if you are an individual investor, you still have the option to establish a position in the fund if you so desire.
Originally posted 2013-07-23 14:16:22.