Morningstar Advisor - February/March 2013 - (Page 46)

Spotlight The Active Fund That Defies Obsolescence By Daniel Culloton Vanguard Wellington is boring and old, but it keeps producing stellar risk-adjusted returns. Here’s how it does it. The strategy of Vanguard Wellington VWELX isn’t supposed to work anymore. Since 2008’s debacle, many pundits and investors have declared the era of the buy-and-hold, 60%/40% stock/bond portfolio dead. It has become common to hear that the only way to build and preserve wealth is to be more tactical and flit among traditional and alternative asset classes. This fund stands in quiet defiance of that trend. It continues to deliver competitive results with acceptable risk by keeping things simple and charging a very low fee. In many ways, it is the epitome of a stodgy old fund run by skilled active managers, one on the equity side and one on the fixed-income side. It buys and holds dividend-paying stocks when the market frowns on them and trims them when they gain favor. Its bond portfolio eschews leverage and derivatives and favors higher-quality corporate bonds with yields that adequately compensate for their risks. The fund’s expense ratio is among the lowest for actively managed moderate-allocation funds, and its managers are seasoned and steeped in and committed to the fund’s approach. It has many desirable qualities. States, but its below-average turnover and slightly cross-grained predilections help it manage its girth. Indeed, during 2011’s maddening volatility, equity manager Ed Bousa bought stocks when they were weak and trimmed when they were strong. He took advantage of declines to buy cyclical companies like Ford F and Dow Chemical DOW and to add to positions like Microsoft MSFT. He reduced utility, health-care, and consumer staples stocks that had done well. As it typically has for years, the fund currently has more in equities than its average moderate-allocation peer, but it hasn’t been riskier. It long-term volatility measures, such as standard deviation, are average to below-average for the peer group, and the fund has delivered investors more return for its risks, according to its 10-year Sortino ratio. There are also a lot of hedge funds that would love to have this fund’s 6% annualized return since Bousa arrived in 2000. To explore how Vanguard Wellington does it, we will take a deep analytical look at the fund using the five pillars that Morningstar’s analysts use to determine their ratings: Process, Performance, People, Parent, and Price. Process At nearly $56 billion in assets, it is the fourth-biggest balanced fund in the United 46 Morningstar Advisor February/March 2013 This is the oldest balanced fund, and it has seen some strategy shifts and many manager changes in its time. The fund’s current approach, however, has been in place and consistently executed for more than 30 years. The fund has always tried to balance stocks and bonds, but early on, it was more flexible. It often shifted assets dramatically among equities, preferred stocks, bonds, and cash. That served the fund well for decades until it hit a slump in the mid-1960s and attempted an ill-fated switch to aggressive-growth investing in 1967. In 1978, Vanguard took the fund back to the future by restructuring it into a disciplined, valueoriented hybrid fund that would keep asset allocation between 60% and 70% stocks and 30% and 40% bonds, as well as refocus on the offering’s roots as an investment vehicle that put equal priority on income generation, capital preservation, and capital appreciation. The managers accomplish these goals in the stock portfolio by seeking out large, dividendpaying companies that are competitive and profitable enough to grow their earnings and dividends over time or are poised to improve on those fronts. The fixed-income portion of the fund focuses mostly on investment-grade corporate bonds, though it will own some Treasuries for liquidity and will dabble in agency-issued, mortgage-backed, asset-backed, and municipal securities.

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2013

Morningstar Advisor - February/March 2013
Letter From the Editor
Social Media, the Old- Fashioned Way
Do You Use Active Strategies?
Youth Appeal
How to Buy the Unloved 2013
Morningstar Managers of the Year
Investments á la Carte
Investment Briefs
Approaches to Absolute-Return Investing
In Agriculture, It’s Good to Be Strong
Yes, There Are Good Active Funds
The Decoupling
Where It Could Pay to Be Active
The Active Fund That Defies Obsolescence
The Epitome of an Active Manager
Lines of Communication
The Existence of Market Timing ‘Intelligence’
A Route to Commodities that Bypasses the Futures Market
Best Positioned for Health-Care Reform
Diversified Stock Funds That Earn Their Stars
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
A Twisted Debate

Morningstar Advisor - February/March 2013