The Vanguard Wellington Mutual Fund’s Smart Move

I have written before about the excellence of The Vanguard Wellington Fund (VWELX) which has delivered returns of 8.3% annually since 1929. When you consider that the imperative of the fund is extreme safety and quality, those returns are quite impressive because of the all-weather nature of the fund. It is a balanced fund, which commits Vanguard to putting 30-60% of its assets in government and high-grade corporate bonds and the rest in low-risk blue-chip stocks.

My view is that it is an ideal holding for those who want to preserve wealth, get a little bit spooked by volatility and/or possess general ignorance of stock-specific investing, and prize stability for their accumulated savings. It is not intended for venturesome accounts or people that want to be rich by age 40 investing a few thousand here and there, but it is intended for people that want to protect what they got and while keeping their present purchasing power intact.

The advantage of being a highly liquid, bond-heavy fund is that your losses will be much more modest periods of economic distress. The price of VWELX tends to hold steady, and the dividend and interest payments keep coming. That’s the appeal.

But what is the tradeoff for capturing that stability? When the stock market roars, the fund will lag. This is especially true when a third of the fund’s assets are in bonds paying negligible interest rates that are lower than the inflation rate.

This year, The Wellington Management Company’s Edward Bousa and John Keough made a very smart move by making three bank stocks top holdings in the Vanguard Wellington fund. The fund owns 22.7 million shares of JP Morgan stock, 34.2 million shares of Wells Fargo stock, and 68.5 million shares of Bank of America stock. This year, JP Morgan stock is up 60%, Wells Fargo stock is up 20%, and Bank of America is up 65%.

The result is that the Vanguard Wellington Fund is up 19% this year. Those are fantastic annual returns when you consider that a third of the assets are invested in bonds (effectively functioning as dead weight in these times). Receiving 19% returns when you’re effectively investing only a bit under 0.7x of the entire pool of assets under management into the stock market is quite praiseworthy.

Bousa first started managing Vanguard Wellington’s assets since 2000, and VWELX has returned 7.5% annually since that time. Meanwhile, the S&P 500 has only given 4.5% annual returns over the past sixteen years. Balanced funds aren’t supposed to beat the S&P 500 over a 15+ year time horizon, and they shouldn’t be delivering nearly 20% annual returns during good years. Vanguard Wellington has been following its safety first mission while adding as much value as you can given the stability constraints. I continue to tip my cap to the Vanguard Wellington’s stewardship of client assets.

Originally posted 2016-12-21 16:00:07.

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