Vanguard Wellesley Income Fund Shines On

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 Strategic Income 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).

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Disclosure: FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this post. The commentary does not constitute ...

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