Vanguard Wellesley Income Fund Shines On

investMichael Fabian:  It wasn’t that long ago that many were calling an end to the out performance that has persisted for years in the Vanguard Wellesley Income Fund (VWIAX) in light of rising interest rate concerns.  After all, how could a fund shackled by a prospectus rule to hold an abundance of fixed-income ever outperform high yield strategies near the low end of an interest rate cycle?

It just goes to show that there is no replacement for common sense asset management during a difficult year in the market.  As a result of their expertise, the $40 billion juggernaut VWIAX was recently named Morningstar’s Top Allocation fund for 2015.

The Vanguard Wellesley Income Fund has been a core holding within our portfolio ever since we started to bulk up on high quality-fixed income assets.  This actively managed multi-asset strategy typically holds 60-65% investment grade bonds, compared to just 35-40% stocks.  We made our first purchase in early 2015, and we have been very pleased with the low volatility and strong income characteristics that the fund has offered our more conservative clients.

Much of the outperformance that the management duo was able to muster came primarily from key holdings in individual stocks such as Kraft and Microsoft Corp (MSFT).  In addition, they were prescient to avoid the pernicious energy stock downfall that would have meaningfully dragged down results.

Furthermore, on the fixed-income side, staying relatively low in duration and very high in quality payed off substantially by providing stable market prices that did not detract from performance.  They have done a masterful job of allocating opportunistically in both fixed-income and equities when their favorite themes are temporarily out of favor.

In my opinion, owning a fund like VWIAX still has its benefits in 2016 compared to other balanced strategies.  In fact, this fund is only down 2.25% from its December high following a strong recovery during the August-September 2015 correction.  This equates to a beta of roughly 0.20 versus an all-stock index such as the SPDR S&P 500 ETF (SPY).


From a technical standpoint, VWIAX is still significantly above the lows that were established last year and has been able to build on a higher low in recent weeks.  This is likely attributable to the portfolio manager shifting fixed-income holdings to agency mortgages and Treasury bonds during the breadth of the decline, further offsetting declines in their equity holdings.

From a strategy perspective, the Wellesley Income fund aligns perfectly with our goals for low volatility, low expenses, sensible asset allocation, and an attractive income stream.  Moreover, investors don’t run the risk of selling the fund as a result of deep draw-downs in the market.  It can be easily held during corrective phases, as evidenced by its strong relative performance during the 2008 financial crisis.

The fund evaluation process in our Strategic Income Portfolio has once again proven to seek out diamonds in the rough of the mutual fund world.  We also identified and invested in the PIMCO Income Fund (PIMIX) prior to it being awarded fixed-income fund of the year in 2013.

While the bulk of our holdings are focused in ETFs, there still remain attractive opportunities in the mutual fund world that are worthy of our attention.

This article is brought to you courtesy of Michael Fabian.

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