On August 1, Fidelity took direct aim at index fund competitors Vanguard, Blackrock’s iShares ...
One Fund Fits All
10/15/2009 11:31 am EST
Russel Kinnel, Morningstar’s director of mutual fund research, and analyst Daniel Culloton find a conservative Vanguard fund that does well in bull and bear markets.
Vanguard Wellesley Income fund (VWINX), [a] conservative-allocation fund, is old school but never out of style. It proves the power of a simple idea: A combo of high-quality bonds and cheap dividend-paying stocks can deliver solid risk/adjusted returns.
This fund tries to provide an above-average yield and a bit of capital appreciation and limit the unsavory surprises for investors. It does so with a combination of stocks with high dividend yields and investment-grade bonds. To maximize yield and keep a lid on risk, the fund keeps about 60% of its assets in mostly mid- to high-quality corporate bonds and 40% in stocks with yields above that of the Standard & Poor’s 500 index.
When other funds dash off to the races during rallies, this fund will look like a slowpoke. Its sluggishness is a virtue in bear markets, though. A heavy bond stake limits losses and its high-dividend yield stocks can provide a cushion, as well. Losing less in bear markets, such as the 2000–02 tech bubble bust and the 2008 credit crunch, has helped produce excellent long-term returns. The fund has gained a more-than-respectable
10% annualized return since inception.
W. Michael Reckmeyer III and John Keogh have been lead managers of the equity and fixed-income portions of this fund, respectively, for little more than a year. Both, however, are old hands at the fund’s longtime advisor, Wellington Management.
For nearly 15 years, Reckmeyer has been a member of the team that picks high-dividend-yield stocks for the fund. Keogh has been managing fixed-income accounts for Wellington for more than two decades and has been the lead manager of the bond portion of the venerable Vanguard Wellington (VWELX) for nearly four years.
Reckmeyer relies on bottom-up research to find large companies with generous payouts and valuations that underestimate their earnings power over a three- to five-year period. He doesn’t trade often, but if a business cuts its dividend or the yield slips below that of the S&P 500, the fund sells the stock.
That’s why, during the financial crisis, the fund had to part with some banks that slashed their payouts to raise capital even though Reckmeyer thought some of them, such as JP Morgan Chase (NYSE: JPM) would survive and even thrive.
Keogh uses fundamental research to look beyond the standard credit ratings and find bonds with yields that compensate for the risk of holding them. He’ll dip into mid-grade issues sometimes, but recently he has focused on new issues from companies that appear to have the financial strength to survive and take share from weaker competitors, including issues from JPMorgan Chase and General Electric Capital Corp.
Although its expense ratio ticked up a few notches due to bear-market-induced asset atrophy, this is the cheapest actively managed fund in its category. (Its expense ratio is 0.33%—Editor.)
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