Mutual fund fans remember 2010 as the year when Vanguard brushed aside archrival Fidelity for the honor as America’s largest fund family. With $1.4 trillion of assets under management and a legendary super-low cost structure, it would seem Vanguard ought to be the best of the breed, in every respect. However, biggest isn’t always best.
Long-term performance is the ultimate test of any mutual fund, and by this yardstick some Vanguard funds are indeed great. Others, though, are middling performers (or worse). What’s more, in some important niches, such as emerging market bonds or multi-strategy bonds, Vanguard doesn’t even put up a contestant.
So, while I have a lot of my own family money invested with Vanguard funds, I recommend that you approach this organization as you would any other financial provider — with a critical eye. Go with the best Vanguard has to offer, and leave the rest!
The Best and Worst Vanguard Funds
In one area, Vanguard holds a powerful advantage over most rivals. If you’re interested in plain-vanilla, investment-grade bonds (corporate, municipals, Treasurys), Vanguard’s ultra-low expenses will help you earn the highest possible cash yield.
Thanks to a minuscule expense ratio of 24 cents a year per $100 invested, the Vanguard Intermediate-Term Investment Grade Fund (MF: VFICX), $3,000 minimum, is tossing off a current yield of 3.5% — generous for a mutual fund with an average maturity of 6.7 years and an average credit quality of A1.
We can dismiss Vanguard’s also-ran funds without much fanfare. The following names have lagged their peers long enough to demonstrate that something isn’t quite right with the portfolio manager. I advise you to unload the following Vanguard mutual funds:
- Asset Allocation
- Market Neutral
- Growth & Income
- Growth Equity
- Strategic Equity
- Structured Large-Cap Equity
Now let’s talk Vanguard’s best-managed funds. One of my favorite all-stock funds is the Equity Income (MF: VEIPX). This is my preferred selection for investors near, or in, retirement. In rip-roaring up years, VEIPX won’t shoot out the lights. However, the fund’s portfolio of high-dividend stocks will fight hard to preserve your capital in down markets.
Its current yield is 2.6%, based on the most recent four quarters’ distributions. Its largest holdings include Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE) and General Electric (NYSE: GE) — franchises that aren’t about to disappear.
Workhorses to Set and Forget
Now I want to talk about two of Vanguard’s old workhorses, Wellington (MF: VWELX) and Wellesley Income (MF: VWINX). The beauty of these funds is that you can pretty much “set and forget” them. They’re balanced funds, holding a mix of stocks and bonds, so their share prices tend to fluctuate much less than a typical all-stock fund does.
What’s the difference between the two?
Wellesley typically aims for a mix of 40% stocks, 60% bonds, while Wellington takes the opposite tack. Because of its heavier bond weighting, VWINX yields 3.6% versus 2.7% for VWELX.
As you might expect, the fund with the higher cash yield gives ground grudgingly in a declining market. In 2008, the worst year for stocks since the Great Depression, Wellesley was off only 9.8%, while the S&P 500 plunged 37%. Wellington, by contrast, was down 22.3% in 2008 — a big loss, for sure, but still a better showing than almost any fund invested exclusively in stocks.
Over the long run, the conservative stance of these two Vanguard funds has really paid off. For the 10 years ended Feb. 28, an investment of $10,000 in Wellesley grew to $18,852. The same stake in Wellington grew to $18,737. Meanwhile, Vanguard’s Index 500 fund, which mirrors the overall stock market, brought up the rear at $12,818. Playing defense created three times more wealth than “throwing the long ball.”
Frankly, I hope the next decade will be a good deal more favorable for stocks. Whatever happens, though, Wellesley and Wellington should continue to fulfill their well-established role, delivering most of the upside you might expect from an all-stock portfolio, with considerably shallower valleys along the way.
Favor Wellesley for new purchases if you’re already retired; otherwise, Wellington.
