When you consider what fund to buy, you should keep a few core principles in mind. Among them should be risk, expense, income, and diversification. The Vanguard Wellington Fund (MUTF:VWELX) scores high marks in all four categories
With a history that dates back to 1929, the Wellington Fund is one of the nation’s oldest and most successful mutual funds. Wellington has successfully navigated through eight decades of financial market turbulence, including the Great Depression, the stag-flationary 1970s, and the more recent credit crisis.
The fund’s success lies in its balanced investment strategy. To reduce risk, Wellington invests about 60% of its assets in stocks and the remaining 40% in bonds. From its 1929 inception, Wellington has earned a compound annual return of 8.18%–enough to turn a $5,000 initial investment into $3.4 million.
A low expense ratio of only 0.27% has also contributed to Wellington’s success. Similar funds average an expense ratio of 1%. It is astonishing how many mutual fund investors ignore cost. Cost is the best predictor of long-term mutual fund returns. Low expense ratio funds tend to earn above average returns while high expense ratio funds often earn below average returns. Vanguard calculates that the cost difference between the Wellington Fund and a typical balanced fund could save a Wellington investor around 17.5% over a 10-year period. Not a small sum.
The fund’s current yield is over 3%, almost a full point above what the S&P 500 is paying, with less risk. In today’s yield-starved environment, 3% on a low-risk portfolio of stocks and bonds with a low expense ratio is an attractive buy. I encourage investors who are retired or soon to be retired to focus–laser-like–on generating income in their portfolios.
The Fund’s largest equity holding, Exxon (NYSE:XOM), is the world’s largest publicly traded international oil and gas company. Founded over 125 years ago, Exxon started as a regional kerosene marketer in Pennsylvania. The earliest brands in Exxon’s lineage were Imperial Oil, and its path would take it through the rise of Rockefeller’s Standard Oil and its subsequent breakup. After the breakup, many parts of Standard Oil went on to grow rapidly in their own right.
In 1999, two Standard Oil descendants, Exxon and Mobil were the largest oil companies in the U.S. They merged to become Exxon Mobil. In 2011, Exxon Mobil produced 2.3 million barrels of oil per day, 13.2 billion cubic feet of gas per day, and refined over 5.2 million barrels per day of petroleum products.
On the bond side, the Wellington Fund’s largest corporate holding is a TD Bank Tri-Party Repo. TD Bank Group is the holding company of Toronto-Dominion Bank (NYSE: TD).
The bank’s predecessors, The Bank of Toronto and The Dominion Bank, were chartered in 1855 and 1869, respectively. Today, TD Bank Group is Canada’s second-largest bank and one of America’s 10 largest banks. In the first quarter of 2012, TD Bank Group had a strong tier 1 capital ratio of 11.6% and total deposits of C$469.7 billion. After the financial crisis hit, Canadian banks with strong tier 1 capital ratios like TD Bank Group were some of the first banks to rebound.
Wellington is suitable for all investors, but it can be used as a core holding for investors in their 30s or 40s. Rely on the mix of 60% stocks and 40% bonds to smooth out the volatile swings in the market, but to still provide meaningful returns.
