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This Vanguard Fund Is Conservatism at Its Best

Vanguard Wellesley Income's strong leadership, effective process, and low fees support the fund's Gold rating.

Alec Lucas, 06/05/2017

The following is our latest Fund Analyst Report for Vanguard Wellesley Income Fund VWINX

Strong leadership supports Vanguard Wellesley's Morningstar Analyst Rating of Gold. That hasn't changed since the early-2017 promotion of credit specialists Mike Stack and Loren Moran to comanagers alongside veteran lead bond manager John Keogh. Stack has 35 years of industry experience and Moran about 15. While Keogh has no imminent plans to retire, either Stack or Moran are well-equipped to take over Keogh's role of top-down risk assessment and yield-curve positioning when he steps down.

Longest-tenured manager Michael Reckmeyer still leads the fund's equity side. He works as part of a seasoned seven-person team and has access to a deep bench of industry analysts.

The fund uses a conservative but effective process. Reckmeyer invests the roughly 35% equity sleeve in above-average dividend-payers, like Philip Morris International PM, which he tries to buy when they're out of favor. Keogh and his comanagers tilt the 65% bond portion toward corporates rated in the A range, which offer a better payout than more highly rated securities but still have little default risk. Keogh eschews big interest-rate bets, but the fund usually sports a longer-than-average duration because he keeps interest-rate sensitivity close to the index's. In April 2017, that index had a 6.7-year duration versus 6.5 years for the fund. In contrast, the allocation--30% to 50% equity Morningstar Category median was 4.5 years.

The fund is prone to lag when interest rates spike, as in 2016's second half, but it has a stellar record in multiyear periods. Through April 2017, its trailing returns of three years or more all ranked in the category's top decile.

The fund has also shown it can weather repeated interest-rate increases by the Fed. Between June 2004 and May 2007, the Fed raised rates by 25 basis points on 17 separate occasions, hiking the overnight lending rate to 5.25% from 1.00%. During that three-year stretch, the fund's 9% annualized gain beat the category norm by nearly 2 percentage points.

The fund's management and strategy inspire confidence for the long term.

Process Pillar: Positive | Alec Lucas, Ph.D. 05/30/2017
This fund receives a Positive Process Pillar rating for its balanced approach to providing income, capital appreciation, and downside protection. The managers invest 60%-65% of assets in investment-grade bonds, and 35%-40% in dividend-paying stocks offering yields higher than that of the S&P 500 and good prospects for growing payouts.

is an analyst of active strategies on the manager research team for Morningstar.

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