What an Impending Manager Change Means for Venerable Vanguard Wellington
The long-tenured manager of this Gold-rated fund's bond sleeve is retiring in June. Should investors be concerned?
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An experienced team employing a time-tested, risk-aware process, combined with low fees, underlie Vanguard Wellington's Morningstar Analyst Rating of Gold.
Edward Bousa has led the equity portion of this balanced fund for more than 16 years, and John Keogh has led the bond portfolio for 12 years. Both have ably served as stewards of this 90-year-old fund that has long employed a conservative, quality-focused process. Keogh is retiring in June 2019 and will pass the reins to seasoned colleagues Michael Stack and Loren Moran, who have worked together on Keogh's team since 2014 and became named managers here in January 2017. This measured transition gives us confidence that the change will be a smooth one. On the equity side, Daniel Pozen was promoted to comanager in March 2019, which suggests that Bousa, who is around 60 years old, is probably considering retirement in the coming years. Pozen has been on Bousa's team since 2015 and is currently a sole manager on a global-equity UCITS. We would expect a similarly paced transition on the equity side.
Bousa keeps equity exposure at 65% of the fund's assets. He invests about half of that stake in stout dividend-payers, with the remainder composed of stocks poised to benefit from supply/demand dynamics and growth names that are added when valuations look attractive. The goal of this approach is to participate in up markets and outperform when markets decline. The bond managers, who are in charge of 35% of the portfolio, run a credit-heavy sleeve. They also focus on high-quality issues so the resulting portfolio has a higher credit quality relative to its average allocation--50% to 70% equity Morningstar Category peer.
Long-term performance has been strong. Over the trailing 10 and 15 years, its returns have landed in top quintile. While the fund retained a higher equity allocation over fourth-quarter 2018 (65% versus the average peer's 59%), its decline of 6.8% was less than the category average decline of 8.6%, a testament to the all-weather approach. Low fees provide an ongoing edge.
Process Pillar: Positive | Patricia Oey 04/10/2019
A time-tested focus on quality drives our Positive Process rating.
The process has remained consistent for 40 years. The managers seek to maintain a 65% allocation in large-cap blue-chip equities, with the remainder in a bond portfolio tilted toward high-quality credit. When the equity portfolio rises to around 67% of the fund, Bousa will trim holdings to bring his allocation back to 65%. Likewise, if equity markets exhibit rising volatility, Keogh will hold slightly more highly liquid instruments so he can quickly provide cash to Bousa when the equity portfolio falls below 63% of assets. The managers do not make tactical calls to tilt toward one asset class or another. Across the portfolio, they keep annual turnover low, at around 30%.
Bousa sticks to large- to mega-cap stocks with strong balance sheets in an effort to create an all-weather portfolio. About half of the equity portfolio is in companies with above-average dividend yields relative to the S&P 500 and that are competitive enough to grow their earnings and dividends over time. The other half is composed of growth names added when valuations are attractive and companies with improving supply and demand trends. The fixed-income portfolio focuses mostly on investment-grade corporate bonds, though it will own some Treasuries for liquidity and will also hold agency-issued mortgage-backed, asset-backed, and municipal securities.
The equity portfolio holds about 100 stocks and has a slight value and larger market-cap tilt relative to the S&P 500. Since 2008, Bousa has gradually built an overweighting in financials, which now accounts for 22% of the equity portfolio, led by top holdings such as JPMorgan Chase (JPM) and Bank of America (BAC). A notable underweighting is in technology stocks, at 12%, but Bousa will scoop up names such as Apple (AAPL) in early 2013 (which he had trimmed throughout 2018) and Alphabet (GOOGL) at the end of 2014 after a stock-price dip. These names help the portfolio keep up during a growth-led rally. His defensive plays include Verizon (VZ) and American Tower (AMT), which also have enjoyed strong secular growth trends. He decided to hang on to U.K. holding BAE and Diageo (DEO), as he felt their global operations would help offset uncertainty at home caused by ongoing Brexit negotiations.
The bond portfolio is benchmarked to the Bloomberg Barclays U.S. Credit A or Better Index, so the fund generally has a higher credit exposure and a longer duration relative to category peers. This helps support the fund’s higher than average yield. Currently, credits account for 65% of the bond portfolio (versus a category average of 25%) and average effective duration is 6.5 years (versus 4.8 years). As for derivatives, Keogh uses Treasury futures for curve positioning and currency forwards to hedge non-U.S. exposures.
Performance Pillar: Positive | Patricia Oey 04/10/2019
Strong returns within its category earn this fund a Positive Performance rating.
Over the trailing 10 and 15 years through March 2019, the Admiral shares’ returned 11.7% and 8.0%, respectively, landing in the 11th and fifth percentile among its Morningstar Category allocation--50% to 70% equity peers. Some of this outperformance is attributable to the fund’s fixed 65% equity allocation, which tends to be higher than the category average, currently at 56%. This can be a tailwind during market rallies but notably has not been a headwind during market declines, as the fund's downside capture ratio consistently remains lower than the category average. During the 2008 market downturn, the fund’s drawdown of 32.5% was significantly less than the category average of 37.9%. Much of this was due to Bousa’s decision to trim financial stocks prior to 2007 on concerns about the housing bubble and an impending turn in the credit cycle.
The managers seek to provide higher levels of income by investing in strong dividend-payers on the equity side and holding an above-average allocation in credits on the bond side. Currently, its trailing 12-month yield of 2.8% is significantly higher than the category average of 1.9%. They have achieved this without courting additional volatility, as the fund’s standard deviation over the trailing 10 and 15 years has been in line with that of the category average.
People Pillar: Positive | Patricia Oey 04/10/2019
Skilled and well-resourced teams on the equity and bond sides support a Positive People rating.
Wellington has been the subadvisor since this fund’s 1929 inception. Edward Bousa was named sole equity lead manager in January 2003 and joined Wellington in 2000. His team includes senior members Matthew Baker, Nataliya Kofman, Daniel Pozen--each have sector coverage responsibilities and are named managers on other funds. The team works closely with colleagues from Wellington's well-regarded global equity research team and have two dedicated analysts. On March 28, 2019, Pozen was promoted to comanager. Since November 2014, he has been sole manager of Wellington Durable Companies, a global equity strategy, with solid results. He joined Bousa's team in 2015.
On the bond side, John Keogh, who has been a named manager since March 2006, will retire in June 2019. The planned transition provided an ample two and a half year period, as Michael Stack and Loren Moran were promoted to comanagers in January 2017. The two have worked together on Keogh's team since 2014 and, like the equity team, have a strong resource in Wellington's global fixed-income research team.
Bousa is around 60 years old, so Pozen's appointment suggests that Bousa may retire in the next few years. Vanguard will likely employ a similar, measured transition on the equity side.
Parent Pillar: Positive | 06/05/2018
The Vanguard Group is the world's biggest provider of open-end funds and its second-biggest provider of exchange-traded funds. Innovative and iconoclastic from its mid-1970s origins, the firm's mutual ownership structure, commitment to low fees, and sensible active and passive investment strategies are hallmarks that support its Positive Parent rating.
Vanguard is committed to serving all investors, not just its own. Indeed, the firm celebrates when its entry into an asset class prompts rivals to lower their fees to remain competitive, as occurred when Vanguard launched index funds in London in 2009 and factor-based strategies in the United States in early 2018.
New CEO Tim Buckley, Vanguard's fourth, faces the challenge of expanding the firm's mission to non-U.S. investors, who currently account for less than a tenth of the firm's $5 trillion in global assets under management. He must also navigate the tension between Vanguard's burgeoning discretionary asset-management business, Personal Advisor Services, and financial advisors who may feel threatened by the firm's efforts to lower the cost of investment advice. Perhaps Vanguard's greatest challenge, though, will be keeping pace with its own growth, especially in overcoming the service problems that have bedeviled the firm the past few years. Vanguard's 2017 implementation of client-experience testing labs should help the firm improve there, too.
Price Pillar: Positive | Patricia Oey 04/10/2019
Rock-bottom fees earn the fund a Positive Price Pillar rating.
The Admiral shares’ 0.17% expense ratio, which applies to about 85% of the fund’s assets, is significantly below the 0.83% median for no-load, moderate-allocation peers. The Investor shares' are also cheap, at 0.25%.
In 2018, the fund trimmed some technology holdings that had appreciated significantly over the past few years. This contributed to the above-average $4.16 capital gains distribution that year for the Admiral shares.
Patricia Oey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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