Fund Spotlight

When considering mutual fund investments, investors often overlook the tactical advantages of currency risk-hedging and defensive strategies. In our increasingly global economy, traditional income growth and preservation plans may not be enough to achieve portfolio goals. Global exposure should provide diversification without posing excessive currency-related risk. The Vanguard Global Minimum Volatility Fund (VMVFX) offers its investors a global portfolio of stocks while minimizing foreign currency exposure through currency hedging.
From the end of June 2014 through July 31, 2016, VMVFX gained 21 percent versus the U.S. Dollar Index’s 20 percent. Over the same period, Vanguard Global Equity (VHGEX), which does not hedge currency exposure, gained only 2 percent. The outperformance in VMVFX over this period was largely a function of its currency exposure.
Conversely, the U.S. Dollar Index has fallen 3 percent since March 30, 2015, while VMVFX has gained 8 percent and VHGEX has gained 6 percent. If VMVFX utilized currency hedging as its sole strategy, it would have underperformed VHGEX. Instead, its minimum volatility approach generated market-beating results that more than made up for the currency drag.
Europe, Japan and China are currently in monetary easing cycles. Post-2008 domestic regulations designed to protect the financial system have also limited money market funds as investors move out of privately issued short-term debt paper and into short-term U.S. Treasury paper to circumvent the new rules. The concurrent quantitative easing policies of central bankers are squeezing privately issued prime funds and fueling government bonds. VMVFX is designed to perform with relative stability as international currencies fluctuate.
Strategy
The Vanguard Global Minimum Volatility Fund aims to achieve broad global stock exposure while simultaneously mitigating the price volatility of global stock market indexes. The fund utilizes structured mathematical algorithms to determine its selections for portfolio allocation. The calculations must meet reduced volatility parameters and correlate the prospective stocks to ensure minimization of overexposure to any particular industrial sectors, regions or relationships between companies that could affect volatility. The formula then applies appropriate Forex futures hedging strategies to eliminate foreign currency risk.
Initial criteria include stocks from the FTSE Global All Cap Index that exhibit lower-than-average volatility. The selection process then continues to eliminate those stocks to within a 5 percent deviation from the parent index and calculates through the other parameters, with regard to position size, industrial sector, etc. As a result, roughly half the portfolio is U.S. domestic securities while the remainder comprises a wide range of foreign stocks that meet the low-volatility criteria.
VMVFX is categorized as a “world stock fund” and has $1.6 billion AUM as of the end of the second quarter of 2016. Its portfolio has 392 different holdings with a brisk 57.3 percent turnover rate and is relatively new, having been founded in December 2013. The current dividend yield is 1.65 percent, and dividends and capital gains distributions are paid annually. The largest sectors that VMVFX holds positions in are, unsurprisingly, consumer defensive, industrials, and healthcare, all of which are historically lower beta. Overall portfolio composition is 38.7 percent medium/small cap, 22.3 percent small cap, 19.1 percent medium cap, 13 percent medium/large cap, and 6.9 percent large cap. Emerging markets make up 8.5 percent of holdings.
The fund’s top 10 holdings reflect its strategy of global diversity. Among its foreign holdings are CLP Holdings Ltd., a utilities company traded on the Hong Kong Stock Exchange; BCE Inc. (BCE), a Canadian telecom company; and Taiwan Semiconductor (TSM-ADR). Household U.S. corporates round out the top 10, with Johnson & Johnson (JNJ), Church & Dwight (CHD), data processing company Jack Henry & Associates (JKHY), Clorox (NYSE: CLX), reinsurer RenaissanceRe Holdings (RNR), Spectrum Brands (SPB) and Kaiser Aluminum (KALU).
Performance
In its relatively short two-and-a-half-year lifespan, VMVFX has an annual average return of 12.03 percent. When compared with the FTSE Global All Cap Index during the same period, VMVFX has demonstrated less than 65 percent of comparable volatility, meeting its mandated strategy goals. At the same time, the strong U.S. dollar and application of Forex hedging protocols, a technique not widely deployed by other World Stock fund rivals, have boosted performance of VMVFX.
The current dividend yield is 1.65 percent.
Management & Fees
The team members managing VMVFX all have a heavy quantitative analytic background – not a surprise given the platform’s reliance on quantitative screens and algorithms. Lead manager Michael Roach has been with Vanguard for two decades and has been the lead manager for VMVFX since its inception. Binbin Guo, PhD, is the head of equity research and portfolio strategies for Vanguard’s Quantitative Equity Group. Anatoly Shtekhman is the junior manager, having just been promoted to a management position this year. Guo and Shtekhman joined VMVFX in February 2016, replacing James Stetler and James Troye.
Popular for its low fees, VMVFX charges a fee of 0.27 percent with a minimum investment of $3,000. Admiral shares (VMNVX) are also available for a slightly lower 0.21 percent fee and a $50,000 minimum investment. Both options are far below the 1.15 percent median average for other World Stock funds.
Conclusion
VMVFX offers global stock exposure while aiming for lower portfolio volatility.
The fund may be especially suitable for those in the five-year holding period range that roughly mirrors the length of U.S. dollar bull and bear markets. Investors who shift international exposure based on U.S. dollar cycles will get the most mileage out of this fund. Currently, we have ranked the fund as a Strong Buy with a ranking of 98.

When it comes to income-based investments, choices are limited, as current prevailing interest rates are at historic lows. Japan and Germany are in negative yields on their sovereign debt, and U.S. 10-year Treasuries are in the 1.3% territory. These unprecedented circumstances leave most income-focused investors scrambling for alternatives. Corporate bonds and junk bonds have seen an enormous increase in demand, despite commensurate expanded risk. Preferred and dividend-paying stocks have also gained popularity, as dividend yields outpace those of bonds.

Mutual funds and ETFs categorized in the growth and income sectors accumulate portfolios of dividend-paying stocks in order to capture the upside market appreciation for the growth portion while collecting dividends to supply their shareholders with the income component. A majority of managers of these blended funds use historical dividend statistics to analyze and determine their selections. The focus is on steady and uninterrupted quarterly dividends. This retrospective approach, however, has its downsides, as evidenced by funds that held General Motors (NYSE: GM) stock before the government bailout.

WisdomTree U.S. Quality Dividend Growth Fund (DGRW) is an ETF that is somewhat contrarian in this regard in that it selects holdings based on anticipated dividend increases in order to meet its targets for yield. While it may seem counterintuitive, DGRW seeks companies in sectors where strong growth prospects are expected to outstrip their expansion needs, with the rationale that the odds of potential dividend increases are inherently better when there is more potential for growth.

DGRW’s stock selection analysis is predicated on the WisdomTree U.S. Quality Dividend Growth Index (WTDGI), a list of 300 stocks that analyzes companies and weights with a bias toward those sectors with both strong market cap and dividend growth, such as the information technology arena. The dividend coverage ratio must exceed 1.0, and the market cap for any company under consideration for inclusion must be a minimum of $2 billion.

Investment Strategy

DGRW is managed by WisdomTree’s Jeremy Schwartz, director of research, and one of his primary analytical strategies utilizes the WTDGI to calculate return on assets (ROA) and return on equity (ROE) as the prime criteria for assessing forward-seeking dividend growth. This process helps eliminate from consideration those companies whose financial leverage status can lead to potential dividend reductions. The inclusion of ROA disqualifies companies whose ROE may be artificially inflated through debt finance. However, ROA and ROE are not infallible predictors of dividend payout policies, in spite of the companies’ demonstrated stronger financial capacity to do so.

The DGRW analysis protocol also includes a sizable number of companies that are eager to enact buybacks of their common shares. Roughly 40 percent of the DGRW portfolio is allocated to the technology and consumer discretionary sectors, both of which have been the historical share repurchasing leaders over the past few years. This is a notable departure from rival ETFs and has been a significant contributing factor to dividend payout growth. The strategic advantage to this approach is that DGRW holdings are overweight with stocks whose prices are a relative bargain as compared with their peers, when based on dividends. The approach also triggers sell targets when the stocks become expensive relative to their peers. Fund strategy policy dictates that no single stock can constitute over 5 percent of the index, and no sector can make up more than 20 percent of the index. There is an annual index rebalance. Morningstar suggests that DGRW has a larger cushion to protect dividend payments in the event that earnings unexpectedly dry up.

Fund Details and Performance

WisdomTree U.S. Quality Dividend Growth Fund has total assets of $635.8 million. Founded in 2013, it has a year-to-date return of 5.11 percent and a 3-year average return of 11.5 percent. Classified as a Large Blend fund, it has an average daily volume of 94,000 shares. The current yield is 2.13 percent, with a distribution yield of 2.24 percent.

Portfolio Composition

With 100 percent of the portfolio invested in growth-oriented, dividend-paying stocks, DGRW is devoid of traditional dividend plays such as utilities or energy stocks, which account for less than 1 percent of holdings. Industrials presently account for 20.42 percent, consumer discretionary 19.75 percent, information technology 19.21 percent and consumer staples 18.51 percent. Financial services at 3.3 percent, basic materials at 2.96 percent, communications services at 1.6 percent and real estate at a scant 0.1 percent round out the remainder. The relatively small real estate and banking stock positions are due to comparatively high financial leverage in those sectors, which impacts ROA.

The top 10 holdings within the portfolio are Coca-Cola, Altria Group, Microsoft, AbbVie, Apple, IBM, McDonald’s, Cisco Systems, 3M and Intel.

DGRW is a solid dividend growth fund that can serve as a core portfolio holding. The fund offers investors payout growth opportunity, but it comes with increased volatility relative to other dividend funds due to its sector weightings. Additionally, it is slightly more volatile than the S&P 500 Index, which is surprising for a dividend-focused ETF.

In sum, investors with longer timelines and a slightly more aggressive outlook may prefer DGRW. For investors requiring current high income, other funds such as Vanguard High Dividend Yield (VYM) or iShares Core High Dividend (HDV) may be more appropriate. Currently, we have recommended DGRW as a Strong Buy with a ranking of 86.

Mutual funds that generate interest income to any meaningful degree have become rare in today’s low rate environment. The Vanguard Wellesley Income Fund (VWINX) has earned 5 stars and Analyst Gold ratings from Morningstar and has weathered market volatility admirably. VWINX is among the longest-tenured funds in the Vanguard family of funds, with $46 billion under management. It is structurally similar to the highly regarded Vanguard Wellington Fund (VWELX), another fine investment option.

VWINX epitomizes the textbook definition of a conservative balanced fund. It offers a true blended portfolio mix of both equities and fixed-income securities to achieve relatively strong income growth, steady income returns and moderate capital appreciation. To manage risk through diversification, the largest holdings constitute 13 percent of total assets. The portfolio contains 60 different equity holdings and 919 different bonds. Average maturity on bonds is 9.9 years and a security is held roughly 6.8 years. Income yield is presently at 2.88 percent. The ratio policy of securities has generally been 30-35 percent in equities and 60 percent in bonds. Vanguard Wellesley Income shares its managers with Vanguard Wellington: John Keogh on the fixed income portfolio and Michael Reckmeyer on the equity portion.

Compared with other balanced funds of similar composition, VWINX ranked in the top 4 percent for 1-year, 32 percent for 3-years and 11 percent for 5-years.

Fund Strategy

The fund portfolio is allocated into four major categories: Intermediate Bond, Large Value, Large Growth and International Securities. The decades-long stability of VWINX is due to adherence by Reckmeyer and Keogh to the portfolio ratio mix and a resistance to “tactical shifts between stocks and bonds, unlike their peers,” according to CNBC.

The roughly 60 percent allocation into fixed income is spread across investment-grade corporate bonds (technically BBB- or better, but Keogh tends to prefer A to A- rated paper). A 20 percent allocation is invested in U.S. Treasury securities, which include short-term U.S. Treasury notes. The bond mix also includes mortgage-backed securities (both commercial and agency) and asset-backed securities. About 2.6 percent of bond holdings are classified as international securities. All fixed income securities in the portfolio are rated investment-grade by Moody’s and Standard & Poor’s.

The balanced fund approach of VWINX has demonstrated the reduced volatility and steady returns that many retirees find desirable. From 1995 to 2015, VWINX returned a total of 539.3 percent, with the only appreciable dip during the 2008 banking and mortgage crisis. In comparison, the S&P 500 returned a 627.3 percent total, but accelerated gains also saw consequential losses of 125 percent from 2001 to 2004 and over 200 percent from 2007 to 2009 before the latest run-up. To compare directly, the S&P 500 fell about 60 percent while VWINX only fell 27 percent from the October 2007 high to the February 2009 low. VWINX investors were better protected than those with heavy exposure to fast-growth stocks.

A $10,000 VWINX investment made in 2006 would be worth $20,573 as of June 17, 2016, based on the fund’s statistical gains over the past 10 years.

The equity portion of the portfolio has its largest allocations in technology, healthcare, consumer defensive, financial services and industrials. The selections also seek dividends to boost the income portion of the fund. Among the stocks Reckmeyer has held for VWINX that make up the Large Value allocation are Wells Fargo (WFC), Johnson & Johnson (JNJ), Exxon Mobil (XOM), General Electric (GE) and JPMorgan Chase (JPM). Caterpillar (CAT) is also a Reckmeyer favorite, and he has expressed a preference for buying CAT on price dips.

The Large Growth portion of the portfolio includes its largest position (1.86 percent of assets) in Microsoft (MSFT), as well as Merck (MRK), Pfizer (PFE), Cisco (CSCO), Intel (INTC) and Verizon Communications (VZ).

As stated above, 2.6 percent of the fixed income allocation is in international securities. The equity portion comprises 6.2 percent of the stock portfolio. The prospectus allows for up to 20 percent in foreign holdings. However, since the bulk of the other equity selections are multinational corporations, Vanguard Wellesley retains flexibility in its international portfolio in order to maintain the liquidity it would need in the event of a correction.

Management

Michael Reckmeyer has managed the stock portfolio for VWINX since January 2007, and John Keogh has managed the bond portfolio since February 2008. As co-managers of Vanguard Wellington, they have achieved superlative returns and their combined tenure exceeds half a century. Last year, Morningstar voted them Allocation Fund Managers of the Year for their work on the Vanguard Wellesley Income Fund.

Fees and Risks

With a minimum $3,000 investment and low fees (VWINX’s expense ratio is 0.23 percent, which is 72 percent lower than the average ratio of comparable balanced funds), the Vanguard Wellesley Income Fund poses relatively low risks compared with other balanced funds. Its Morningstar sustainability rating is 4 out of 5, and it ranks in the top 18 percent of its category. Morningstar has assessed its risk as below-average for 3 years and low for 5 and 10 years. Its return ratio across the board for all time frames is also highly ranked.

Returns

Since its 1970 inception, VWINX has averaged 9.95 percent in annualized returns, and more recent performance yields include 7.54 percent over the past 10 years, 8.11 percent for the past 5 years and 7.53 percent for the past 3 years. Over the past year, the fund has returned 7.62 percent through June 30, 2016. The fund’s 10-year return outperformed the S&P 500’s return over the same period.

Conclusion

While maintaining equity and bond exposures separately is generally the most prudent option, strong management and an impressive track record make Wellesley Income (VWINX) a solid option. Vanguard Wellington (VWELX) is also worthy of consideration. VWINX allocates an additional third of its portfolio to bonds, offering a viable option for retirees or more equity-wary investors who tend to favor bonds. Currently, we have issued a Strong Buy recommendation for VWINX with a ranking of 94.

Successful investing requires appropriate asset allocation and sticking to an investment strategy amid turbulent markets. Volatility can unnerve some investors to an extent that jeopardizes long-term goals. A portfolio’s mix of stocks, bonds and other investments is an important factor in its performance. A diversified portfolio should also include an exposure to international and emerging market stocks. Once this balance is achieved, investors must then adhere to their strategy. Volatility often drives emotions that can cause investors to buy at the highs and sell at the lows. Emotional investment decisions generate inferior results when compared with the performance of an index like the Standard & Poor’s (S&P) 500.

Recent studies show that the market is becoming more volatile. The goal is to create an investment strategy that minimizes the risk of volatility while still obtaining market-like returns. Low volatility funds can instill the confidence that helps investors stay invested during the ups and downs of the market. Investment vehicles like the iShares MSCI EAFE Minimum Volatility Fund (EFAV) are designed to capture a meaningful percentage of upside swings while limiting downside exposure as much as possible.

Fund Overview

iShares MSCI EAFE Minimum Volatility Fund provides defensive exposure to large- and mid-cap stocks listed in developed Europe, Asia and Australia. The goal of EFAV is to offer a more favorable risk/reward profile than the broader market-cap-weighted MSCI EAFE Index. The fund invests at least 90 percent of assets in components of the underlying benchmark. Although the fund should lag its benchmark during rallies and hold up better in a down market, EFAV has outpaced the benchmark from its inception in 1988. With 78 percent less volatility, it is a suitable core holding for conservative investors.

Fundamental View

This low-volatility fund has a tilt toward stocks with high profitability and low valuations, which are characteristics historically associated with better-than-average returns. First documented in 1972, this low-volatility effect results in stocks with low betas, or sensitivity to market fluctuations, which generate better returns relative to their risks when compared with stocks with higher betas. A similar relationship was found for a portfolio consisting of low-volatility stocks. Rather than substitute bonds for equities to reduce volatility and limit losses, low-volatility stocks are used. These stocks reduce downside risk but still have the potential for greater returns during a rising market than does a stock/bond portfolio with similar volatility.

Investment Strategy

Fund managers seek to replicate the performance of the MSCI EAFE Minimum Volatility Index. This underlying benchmark attempts to create a portfolio of the least volatile stocks in the MSCI EAFE Index. The investment strategy utilizes the Barra equity risk model to estimate each stock’s volatility, its sensitivity to various risk factors like valuations and the correlation between them. A proprietary algorithm sorts the data to select the optimum investments and weightings that should produce the lowest volatility based on several constraints. These include keeping sector and country weightings within 0.05 and 1.5 percent of those in the MSCI EAFE Index. One-way turnover is also limited to 10 percent. These constraints improve diversification, enabling the fund to be used as a core holding. The strategy assumes that past volatility and correlations will continue in the short term, which has been the case historically. The index portfolio is reconstituted semiannually.

Portfolio Construction

In contrast to the MSCI EAFE Index, the investment strategy has created a portfolio with higher exposure to defensive sectors, such as consumer defensive, health care, telecom and utility stocks. The portfolio also has less exposure to the financial, energy and technology sectors. The fund is weighted toward Japan and the United Kingdom and underweight the eurozone based on its recent volatility. Risk is mitigated by holding more than 200 separate securities and limiting the exposure of the top 10 holdings to less than 15 percent of assets under management. Top holdings include Unilever, GlaxoSmithKline PLC and Swiss Re. Although the portfolio has a smaller average market cap than the MSCI EAFE Index, it generated slightly higher returns on invested capital over the trailing 10-month period ending April 2016.

Fees

The fund has a reasonable 0.20 percent expense ratio. Even though it is engaged in a more dynamic investment strategy, the fund’s expense ratio is not much higher than that of the cheapest market-cap-weighted alternative. The cap on turnover limits trading costs. BlackRock also engages in securities lending as a way to generate ancillary income that can partially offset expenses. Over the past three years, the fund has trailed its benchmark by six basis points.

Alternatives

The closest alternative to EFAV is the PowerShares S&P International Developed Low Volatility Fund (IDLV). This fund uses a simplified ranking system for international stocks based on their 12-month trailing volatility. Stocks in the lowest quintile are selected and then weighted based on the inverse of their individual volatility. As result, the least volatile stock receives the highest weighting within the portfolio, which is rebalanced quarterly. Because IDLV does not place restrictions on country or sector weightings, the fund can make concentrated investments. Unlike EFAV, the fund invests in Canadian stocks and does not have a turnover limit. IDLV has a slightly higher 0.25 percent expense ratio.

Another comparable option is the iShares MSCI All Country World Minimum Volatility ETF (ACWV), which applies the low-volatility investment strategy to a portfolio of global stocks. This ETF employs the same investment methodology as EFAV, while also including securities from emerging markets as well as the United States and the rest of the developed world. ACWV has a higher 0.34 percent expense ratio.

A third alternative is the Vanguard Global Minimum Volatility Fund (VMVFX). Similar to ACWV, it utilizes a strategy that optimizes correlations and stock volatility when constructing the portfolio. In addition to hedging its currency exposure to further reduce volatility, VMVFX includes domestic and foreign stock allocations. Unlike EFAV, this fund does not track an underlying benchmark index. This gives managers greater flexibility in stock selection, weightings and holding times, which lowers trading costs while providing the ability to wait for an investment to pay off. The fund’s Admiral Class shares have a 0.20 percent expense ratio and require a $50,000 minimum investment. Smaller investors can purchase Investor Class shares that have a 0.30 percent expense ratio with a $3,000 minimum initial investment.

iShares MSCI EAFE Minimum Volatility ETF (EFAV) offers an alternative to broader, more volatile international funds, with the potential for higher yield. While market conditions do not warrant increasing international exposure or reducing bond exposure in favor of the fund, it may be a favorable replacement for ETFs in the same category. 

Fund Spotlight: iShares MSCI EAFE Minimum Volatility Fund (EFAV)

Holding stocks and bonds separately in a portfolio allows for more tailored bond exposure and makes it easier to shift money between the two as needed. Many balanced funds, particularly retirement date funds, overweight equity exposure in funds aimed at older investors and allocate too much bond exposure for younger clients. That said, there are some good balanced options out there.

Balanced funds offer a broadly diversified portfolio within a single fund and automatically rebalance assets to maintain targeted exposures. While a balanced fund may not provide the same performance during a rapidly rising bull market, it will fall far less during a market pullback. The bond component of a balanced fund tends to smooth out the volatility of its stock market allocation. These investments may also be appropriate for investors who are just starting out or for those with limited assets.

A standout among balanced mutual funds is the Vanguard Wellington Fund (VWELX). The fund outperforms its balanced category peers and has held up well versus the S&P 500 Index while minimizing risk.

Fund Overview

Established in 1929, VWELX is Vanguard’s longest-standing mutual fund and the oldest balanced fund in the country. Boasting a five-star Morningstar rating, the fund has $89.9 billion in assets under management. VWELX seeks long-term capital appreciation as well as a moderate level of current income. Managers maintain between 60 and 70 percent of assets primarily in dividend-paying stocks. The remaining assets are allocated to fixed-income securities that the advisor believes will generate sufficient income. These assets include investment-grade corporate bonds and U.S. Treasuries, as well as government agency- and mortgage-backed securities.

Investment Strategy

The fund has always tried to find the optimum balance between equities and fixed-income securities. Since 1978, the managers have maintained VWELX as a value-oriented fund with a stock allocation between 60 and 70 percent of AUM with the remainder in bonds. Current lead manager Edward Bousa attempts to keep the allocation within 2 percentage points of 65 percent. This targeted range is more disciplined than the range maintained by his peers.

The management team places equal emphasis on capital appreciation, income generation and capital preservation. These three goals are met by selecting large-cap dividend-paying companies that also demonstrate the potential to increase their earnings and dividends over time. Managers look for stocks that are poised to appreciate in value due to favorable market or economic conditions. The equity sleeve’s tilt toward competitively advantaged dividend payers also helps preserve capital, as these stocks tend to have lower volatility over time. Buying these stocks when they are out of favor has the potential to deliver capital appreciation as well.

Although the income sleeve focuses primarily on investment-grade corporate bonds, the fund will also hold Treasuries, which can be quickly liquidated at good prices if managers see an opportunity in equities. When warranted, fund managers may also purchase asset- and mortgage-backed securities. Managing the fixed-income sleeve, John Keough attempts to keep the portfolio duration within one year of the Barclay’s U.S. Credit A or Better Bond Index. While managers avoid large tactical shifts, they will take advantage of opportunities that arise from market fluctuations. This coordinated approach has produced strong returns in diverse market conditions and is one reason for the fund’s stellar long-term record.

Portfolio Composition and Holdings

The fund has a 58 percent exposure to domestic equities as well as an 8 percent allocation to foreign shares. Slightly more than 33 percent was allocated to fixed-income securities. The equities sleeve had a 65 percent exposure to giant-cap shares along with 32 percent and 2 percent of assets in large- and mid-cap shares, respectively. The portfolio is overweight the financial services and healthcare sectors, and underweight basic materials and consumer cyclical shares. With the focus on giant caps, the average market cap is $98 billion. A slight value tilt shows up in valuation ratios; the equity sleeve has a price-to-book ratio of 2.1 and a price-to-earnings ratio of 16.07, both about 10 percent below the S&P 500 Index.

The fund’s bond holdings consist primarily of assets with an A or better credit rating. There is slightly less than 20 percent exposure to BBB-rated bonds. The portfolio has an average maturity of 9.8 years, an average duration of 6.62 years and an average coupon of 3.6 percent.

Historical Performance and Risk

VWELX has proven itself for nearly 90 years. A $10,000 investment in 1929 would currently be worth $9.3 million. VWELX garners 70 percent of the upside even though its portfolio is only weighted 65 percent in equities. VWELX also outperforms when the market falls. When stocks sold off in January and February, VWELX was down 5.2 percent compared with the S&P’s 10.7 percent loss.

VWELX’s returns are comparable to the S&P 500 over the most recent 10-year period and outperformed the benchmark over a 15-year period. The fund has also typically beaten the majority of its category peers, with less volatility. This resilience earned a Gold analyst rating from Morningstar, which also gave the fund high return and average risk ratings.

Over the most recent 1-, 3- and 5-year periods, VWELX has delivered total annualized returns of 1.93 percent, 7.53 percent and 8.50 percent, respectively. These compare with the moderate allocation category averages of -0.76 percent, 4.71 percent and 5.38 percent over the same periods.

Over the past 10- and 15-year periods, VWELX gained an annualized 7.33 percent and 7.06 percent, respectively. Vanguard 500 Index (VFINX) gained 7.29 percent and 5.44 percent over the same periods, highlighting the value of diversification in volatile markets. The fund’s 3-year beta and standard deviation of 0.66 and 7.58 are less than the 1.00 and 11.32 of the Vanguard 500 Index Fund (VFINX).

Fees, Expenses and Distributions

VWELX is no-load and charges a low 0.26 percent expense ratio. This is 64 basis points lower than the median no-load, moderate allocation mutual fund and lower than 97 percent of its peers. The adjustment is based on the fund’s performance over a 3-year period versus the returns of the Wellington Composite Index, which is made up of a 65 percent weighting in the S&P 500 Index and a 35 percent weighting in the Barclay’s U.S. Credit A or Better Bond Index.

There are no 12b-1 fees. The fund has a minimum initial investment of $3,000 and a $1 subsequent investment minimum thereafter. As of June 10, VWELX has a 30-Day Securities and Exchange Commission yield of 2.4 percent.

Conclusion

While most investors are best served with a diverse portfolio of individual bond and stock funds, a balanced fund such as Vanguard Wellington provides an alternative that is worth consideration. Shrewd active management and a strong performance history make VWELX attractive, along with its very low fees. Currently, we have issued a Strong Buy recommendation for VWELX with a ranking of 87.