Vanguard Wellington Fund turns 90 years old this year. It is Vanguard’s oldest fund, founded by Philadelphia accountant Walter L. Morgan, famed for giving Vanguard founder John Bogle his start.
The Wellington Fund is what’s known as a “balanced” fund, with a mix of stocks and bonds, and it survived the Great Depression in 1929, the 2008 Financial Crisis, and the latest 2018 market correction. Morgan started the fund as a way to invest mutually for his accounting and tax clients, who often asked him for investing advice.
Started with just $100,000 of Morgan’s savings and money from friends and clients, today the Wellington Fund oversees assets of $102 billion, making it among the industry’s largest balanced fund. The fund has paid quarterly dividends since 1930 and returned 8.24 percent annually on average since inception, according to Vanguard spokesperson Melissa Kennedy.
We spoke with Dan Newhall, who oversees a team of analysts who help the investment committee overseeing all Vanguard portfolios, to ask about the fund’s current status. Newhall said Wellington is sometimes referred to as the “blue blazer” of Vanguard mutual funds — that’s a compliment, by the way. Not sexy, but reliable.
Vanguard runs about 88 percent of investors’ $5 trillion assets in-house, but also subcontracts with outside managers such as Wellington, PRIMECAP, and others. Wellington Management oversees the Wellington Fund and is the biggest outside money manager for Vanguard, Newhall said.
Wellington Fund, which aims for long-term capital appreciation and some current income, invests approximately 60 to 70 percent of assets in blue-chip stocks, and 30 to 40 percent in government and corporate bonds. Since it has a mandate to generate dividends for investors, it is popular among retirees, just like its sister fund, the Wellesley Income Fund, Newhall said.
After straying from Morgan’s original strategy, “in 1978, Vanguard engaged with Wellington and said we wanted a greater focus on long-term and higher quality companies that provide greater downside protection and dividend income,” Newhall said.
“It’s an approach that’s incredibly enduring. You could characterize the approach somewhat as value. The portfolio managers are reluctant to go after higher priced stocks and non-dividend yielding stocks.” Instead, its top 10 holdings include Microsoft, Verizon, JPMorgan Chase, Bank of America, Alphabet, Chevron, Comcast, Chubb Ltd., Prudential Financial, and Pfizer.
From a strategic level, Wellington Fund portfolio managers “steer away from more aggressive companies,” he said. And yet, the stock market’s record returns have been driven by growth companies in the past decade, so Wellington has lagged the S&P 500.
For conservative investors, Wellington Fund provides downside protection in bear markets and corrections.
“Look at the 2000-2002 bear market, or the last quarter of 2018,” Newhall said. “Wellington Fund provided attractive downside protection. That keeps investors in the game and doesn’t shake them out in periods of volatility,” he said.
Wellesley Fund, another dividend income fund run by a different team at Wellington, “has an even greater focus on equity income. In that fund, before they buy a new company, managers look for a 30 percent premium yield to the market,” he said.
While the Wellington Fund managers look to buy companies with a dividend, but not necessarily at a 30 percent premium to the S&P 500 dividend yield. Its current yield is 2.6 percent in the stock portfolio (which is two thirds of the assets) and 3.5 percent in the fixed-income portion of the portfolio. The fund’s total yield is 2.5 percent, according to Vanguard’s website.
What does Vanguard forecast now that the stock market had such a terrific run-up?
“We feel it’s become more expensive. Consequently, growth rates should come down from where they’ve been historically. For bonds, expectations for returns on fixed income should come down. We’re in a slower growth world,” Newhall said.
While the value sectors of the stock market have outperformed growth over decades, currently growth is investors’ favorite.
“We really don’t advise people in general to tilt one way or the other” toward value or growth, he said. “From an active management standpoint, that limits the risk. It’s more defensive strategy. It may not capture all the excitement but provides downside protection.”
Investors flocked to Vanguard after the 2008 crisis.
The Malvern-based investment firm experienced historic inflows of new money from investors who chose passive investing in index funds after suffering painful losses in actively managed funds. At one point, Vanguard was taking in $1 billion in new money every day, much of that in index funds that simply track the broader market. Today, it is still crushing competing firms such as BlackRock, Fidelity, and State Street.
Rather than active vs. passive, however, Vanguard insists investors should focus on “low-cost” investing vs. high cost.
“Wellington is a bit more expensive than an index, but not so much. If you can tolerate an active manager risk, the potential for outperformance has been material over time,” Newhall said. Wellington’s fee is 0.25 percent annually.
Wellington is considered a steady-eddy mutual fund that has survived massive drawdowns. The fund had big losses in 1974 and in 2009. During that latter crisis, investors found themselves 32.5 percent below prior highs, but the fund recovered within two years.
“Wellington’s history demonstrates that drawdowns are a natural part of investing, but time in the markets wins out, and active management can work. The fund has put Balanced Index, with its comparable asset weighting, to shame in the performance derby,” noted Dan Wiener, editor of the Adviser Investments newsletter for Vanguard customers.
Since Balanced Index’s inception more than 26 years ago, "Wellington has outpaced the index fund by 1.4 percent a year, which translates into a cumulative return of 874.3 percent vs. 600 percent — small differences can really add up over time,” Wiener said.