Vanguard Wellesley Income Fund has used a mix of high-quality bonds and dividend-paying stocks to outperform all peers in the past five years, when record low interest rates put a premium on the assets it favors.
Vanguard Wellesley, which has about two-thirds of its $34 billion of assets in bonds, had the best risk-adjusted performance among large U.S. balanced funds since 2008, beating rivals holding a greater proportion of stocks. Managers John Keogh and W. Michael Reckmeyer III produced the third-lowest volatility and the second-highest total return among 34 U.S. balanced funds with at least $2 billion in assets, and had better absolute performance than both the stock and bond markets in the period, according to the BLOOMBERG RISKLESS RETURN RANKING.
The Federal Reserve’s decision to hold rates near zero since 2008 has sent investors scrambling for higher yields, creating demand for the income-producing securities and dividend stocks that Vanguard Wellesley buys. The fund’s focus on corporate debt, typically 75 percent of the fixed-income portfolio, also proved advantageous in an era in which such bonds outpaced government debt and stocks. The fund’s tilt toward bonds could be a handicap if rates climb over the next few years.
“This fund’s performance gives lie to the notion that active management doesn’t work,” Daniel Wiener, editor of the New York-based newsletter Independent Adviser for Vanguard Investors, said in a telephone interview.
Mirror Image
The Vanguard Wellesley, started in 1970, keeps 60 to 65 percent in bonds and was designed to be the mirror image of the $69 billion Vanguard Wellington Fund, created in 1929, which holds 60 to 65 percent of its assets in stocks and the rest in bonds. Vanguard Wellington wasn’t part of the ranking because it has a relatively high weighting to stocks and is in a different fund category, according to data compiled by Bloomberg.
Vanguard Group Inc., the biggest U.S. mutual-fund company with more than $2 trillion in assets, is best known for its low- cost index funds. The Valley Forge, Pennsylvania-based firm also offers active strategies through funds managed by firms such as Boston-based Wellington Management Co., which runs $250 billion for Vanguard. Wellington Management, which oversees about $758 billion in total, manages both the Wellesley and Wellington funds.
The Vanguard Wellesley fund is aimed at investors “who have a goal of steady income and who are willing to accept modest movement in share price,” Vanguard said on its website.
Beating Rivals
“I think of Wellington and Wellesley as the original target-date funds,” Dan Newhall, a principal at Vanguard, said in a telephone interview, referring to funds designed to shift to more conservative investments as investors approach retirement. The Wellington fund is more suitable for someone in the accumulation phase, said Newhall, while the Wellesley fund is a better fit for retirees or more risk-averse investors.