Why We Highly Rate Vanguard Wellesley Income

Key Morningstar Metrics for Vanguard Wellesley Income

• Morningstar Medalist Rating: Gold
• Process Pillar: High
• People Pillar: Above Average
• Parent Pillar: High

Vanguard Wellesley Income’s VWIAX experienced managers benefit from formidable analyst teams and oversee a time-tested approach grounded in bottom-up research. Combined with low fees, this fund remains a top choice for income-focused investors.

Managers Matthew Hand and Loren Moran lead the equity and fixed-income sleeves, respectively, and oversee the portfolio’s 35% equity/65% fixed-income allocation. Hand joined Wellington and the fund in 2004. He became a named manager in 2021 and took sole control of the equity sleeve when longtime manager Michael Reckmeyer retired in 2022. Moran has comanaged the fund since 2017 and took the reins of the bond sleeve in 2021 after a multiyear transition saw two longtime managers retire in 2019 and 2021. These transitions were thoughtfully handled, and both managers were well equipped to take over.

The two lead managers avoid making large shifts between stocks or bonds; instead, they’ve kept the equity allocation within a 4-percentage-point range over their shared tenure. The fund will likely hold a higher allocation to the dividend-focused equity sleeve when interest rates are lower while maintaining a more neutral stance when rates are higher. Keeping the stock/bond split relatively steady means the team’s strength of security selection, rather than asset-allocation decisions, will be the primary driver of returns, which should benefit long-term shareholders.

Hand and his dedicated team of five take a contrarian approach, guiding them to companies with strong fundamentals and above-average dividends that have experienced short-term headwinds, offering an appealing entry point thanks to their attractive valuations. This philosophy leads to a high-conviction portfolio of 50-70 stocks that exhibits a tilt toward value and defensive stocks. This posture has benefited the fund in times of market stress, like 2022′s stock and bond market declines, when it fell by 4 percentage points less than the average peer over the year.

The bond sleeve consists of almost entirely investment-grade bonds, and it tends to have a longer duration than peers. The team has historically allocated 60% to 70% of the sleeve to corporate debt, 20% to taxable municipal bonds and asset-backed securities, and the remainder to US Treasuries and agency securities for liquidity management.

Vanguard Wellesley Income: Performance Highlights

This fund touts an impressive long-term record. Over the trailing 10-and 20-year periods through February 2024, the admiral share class’ 5.2% and 6.2% returns outpaced both the moderately conservative allocation Morningstar Category and Morningstar Moderate Conservative Target Risk Index benchmark. The fund is typically less volatile than most peers, leading to its Sharpe ratio (a measure of risk-adjusted return) eclipsing at least 96% of peers over both periods.

The fund has shown resilience during market downturns, contributing to its long-term outperformance. During the coronavirus-driven selloff in 2020 from Feb. 20 to March 23, the portfolio lost 17.3% compared with the benchmark’s 16.1% loss but fared better than 65% of peers. During 2022′s falling stock and bond markets, the fund’s 9% decline was shallower than 92% of peers, with the benchmark falling by 4.8 percentage points more. The equity sleeve’s tilt toward value stocks aided the fund as value stocks outperformed growth stocks during the year. Shorter duration and defensive sector positioning within the bond sleeve also helped.

While the fund provides consistent downside protection, it can lag during market rallies. For example, during 2023′s growth-fueled rally, the fund fell in the bottom decile of the category and underperformed the benchmark by 379 basis points. Growth stocks wildly outperformed value stocks, and the equity sleeve’s value orientation damped results.