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.