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 wield a proven process rooted in fundamental research. Paired with low fees, this fund is an excellent choice for investors seeking an income-focused allocation fund.
Equity manager Matthew Hand and fixed-income manager Loren Moran lead their respective sleeves and oversee the fund’s 35% equity/65% fixed-income allocation together. Hand is a Wellington veteran, joining the firm and the fund in 2004 before ascending to portfolio manager of this fund in 2021. He assumed control of the equity sleeve when his predecessor 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. Sound succession planning ensured smooth transitions, and both managers are well-equipped to lead the fund.
The stock/bond split can shift up or down by 5 percentage points, but the managers avoid making large shifts, playing to their strengths in bottom-up security selection. Hand and Moran have kept the equity allocation between 36% and 40% over their shared tenure. The income mandate can lead to a higher allocation to the dividend-focused equity sleeve during times of lower interest rates, such as throughout 2021, while it stays more neutral when interest rates rise.
Hand’s approach is contrarian. He and his team look for dividend-paying stocks that have experienced a negative short-term market event but still have strong fundamentals, presenting an attractive entry point. For example, Wells Fargo & Company WFC went through numerous scandals and management changes in the late 2010s and early 2020s, but the team believes things have turned around, and the company was underappreciated when it was added in late 2023. Emphasis is placed on stocks that can sustain and grow their dividend over time.
The fixed-income sleeve consists almost entirely of investment-grade bonds. It is meant to complement the equity sleeve by dampening volatility while adding income. Corporate credit has historically occupied around 60% of the sleeve and typically offers a yield higher than US Treasuries. Still, the team doesn’t take on undue risk to reach for yield and applies its thorough security-selection approach to quality investment-grade issuers.
Vanguard Wellesley Income: Performance Highlights
This fund maintains a strong long-term track record despite underwhelming performance in recent years. Over the trailing 10-, 15-, and 20-year periods through February 2024, the Admiral share class’ returns fell in the top decile of the moderately conservative-allocation Morningstar Category. The fund is typically less volatile than most in the category, contributing to its Sharpe ratio (a measure of risk-adjusted return) surpassing at least 95% of peers over the three periods.
Both 2023 and 2024 were challenging years for the fund; its 7.1% and 6.0% returns trailed the category average by 3.5 and 2.0 percentage points, respectively. The fund’s value bias was a headwind as growth stocks handily outperformed value stocks during both years. Environments where risk is rewarded are challenging for this fund, given its more defensive posture, but the fund’s ability to sink less than peers and benchmarks during stress periods has been a strength.
The fund’s long-term performance has been buoyed by its durability in market downturns. For example, during 2022’s double stock and bond market declines, the fund dropped 9% compared with 13% for the average peer, 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.
