Morningstar Advisor - February/March 2013 - (Page 46)
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.
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?
How to Buy the Unloved 2013
Morningstar Managers of the Year
Investments á la Carte
Approaches to Absolute-Return Investing
In Agriculture, It’s Good to Be Strong
Yes, There Are Good Active Funds
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