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.