VWINX Is The Only Retirement Fund You Need, Unless You Expect Solid Returns
Summary VWINX has great historical performance as it invested heavily in high quality debt issues that appreciate when yields drop. Unless yields go negative, it shouldn’t be possible to duplicate that portion of performance. I would prefer to keep my bonds in tax deferred accounts. The dividend-paying stocks can reasonably be held in a taxable account. The result is a mismatch of styles. VWINX has had fairly low levels of volatility, but even low levels of volatility require meaningful expected returns. VWINX is a great fit for investors that are not knowledgeable about investing, but not such a great fit for the kind of people that read about investments. I saw a piece on Vanguard Wellesley® Income Fund Investor Shares (MUTF: VWINX ) this weekend that got me curious about the fund. It was good introduction to the fund that left me wanting to know more about the primary question. Was VWINX satisfactory for retirement as a singular investment? If you look at some of the basic facts laid out, I think it would be reasonable for investors to think that this fund might be enough by itself. I humbly disagree. After reading the piece I started doing more research because VWINX was delivering very solid returns given how stable the results were. However, as all readers should know, past performance is no guarantee of future performance. In my opinion, it would be nearly impossible for VWINX to duplicate its performance from the last decade under any modern understanding of economics. How does VWINX invest? The fund holds 60 to 65% of resources in government securities and corporate investment grade bonds. Ironically, that may even include MBS. I frequently cover the REIT sector and my preferred part of that sector is mREITs. In my opinion, MBS have very little in common with investment grade corporate bonds. When we look more specifically at what bonds the firm is holding, I see a disturbing trend. The top holdings are all US treasury notes or bonds. These are either yielding under 2% or have a maturity past 2040. The short-term performance of the fund includes appreciation in the price of government bonds as yields are at absurdly low levels. Unless we see interest rates go negative, it won’t be possible for these bonds to appreciate that way over the next decade. By mixing in short-term securities the portfolio is able to limit its duration (interest rate risk) from becoming absurdly high, but the short-term securities just don’t offer enough yield. If an investor is hoping for substantial returns, buying bonds near par with a 1% coupon rate just doesn’t cut it. The rest of the resources go into companies that pay solid dividends or are expected to pay solid dividends. Companies like Wells Fargo (NYSE: WFC ) and Microsoft (NASDAQ: MSFT ) are at the top of the holdings. I think it’s a very reasonable idea for a mutual fund designed to produce income for retirees (yield = 3%) to include a substantial allocation to dividend stocks that will pay qualified dividends. However, that brings us to part of the challenge here. Taxes and turnover The portfolio turnover is 109%. The fund is heavily invested in bonds and there may be some substantial tax disadvantages to holding the mutual fund in a taxable account. I’m not a CPA, so I won’t try to predict the exact implications, but if I wanted to get diversified exposure in a taxable account, this isn’t how I would do it. I would use the tax deferred accounts to hold my bonds and REITs and I would use my taxable account to buy and hold large dividend paying stocks or ETFs. As long as possible, I would attempt to defer recognizing gains. Volatility reduction isn’t enough I’m often one of the first analysts to point to the volatility of an ETF or mutual fund as an indication that it is or is not providing too much risk for the expected return. In this regard, VWINX is very steady. However, without any reasonable expectations for long-term capital appreciation on the bond portfolio, the expected future return should be substantially less than the historical return. That doesn’t mean that I think the fund is a “bad” investment. However, I do believe that investors can find better options from Vanguard. While the fund sports an expense ratio of .25%, which is dramatically below the category average (1.28% by my sources), I think investors can still find better. If an investor would like to use Vanguard products like VWINX, I’m a big of the Vanguard Total Stock Market Index (NYSEARCA: VTI ). I recently invested heavily in another mutual fund, (MUTF: FSTVX ), because it has an extremely high correlation with VTI and was available in a Fidelity account. I put together a great piece explaining my reasoning . The real benefit of VWINX In my opinion, the biggest advantage to VWINX is simply that combining the bonds and stocks into a single account under a single Vanguard manager allows the stocks and bonds to be rebalanced without the investor being emotionally involved in reallocating between the investments. That may help the portfolio continue to resemble the intended asset mix. However, the benefit of having a professional manager rebalance the portfolio is substantially smaller for the kinds of investors that enjoy reading up on their holdings. In my opinion, VWINX is a better fit for the 401k of a worker that doesn’t know the first thing about stocks or bonds and is planning to retire within the next several years. For investors that are able to do it themselves, I’d rather take VTI and combine it with holdings in another bond portfolio. There are numerous bond ETFs or mutual funds to choose from, but I’d focus on low expense ratios and solid diversification among the holdings. Disclosure: The author is long (FSTVX) (VTI). (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.