Late 30's, considering Wellesley/Wellington -- usefulness?

[Urchina]

Question for those of you who have (or have not) used Vanguard's Wellesley/Wellington funds. DH and I are planning to RE (late 50's, about 20 years away). Right now we are 95% in index funds, and 95% in stocks. (Aggressive portfolio, high risk tolerance). However, we are ready to move to more bonds (probably a 80/20 stocks/bonds mix) and are considering Wellington/Wellesley as part of this, because we also like the idea of building holdings in these funds as an income stream. We would keep the bulk of our funds in Vanguard stock and bond index funds.

I can see the clear utility of these two funds for people who are already retired (some growth and consistent income), but what does the board think of them for people who are a couple of decades away from retirement? Pros and cons of this approach?

If you think they might be a good choice for people who have just hit 40, where would you put them? Our options are Roth IRA, Traditional IRA, and taxable accounts. I realize that because they generate income, they are not usually recommended for taxable accounts. We fund our Roths through conversions from our traditional IRAs (since we're not eligible to contribute to them directly).

Thanks for the input!

 

[nun]

There's no magic to Wellesley and Wellington, you can recreate a similar asset allocation from Vanguard index funds. Having said that my 403b has been 100% Wellesley for the past 10 years and I also have some in my IRA, mostly due to inertia. The fees are a bit high, but any young investor could do far worse than just put money into Wellington.

 

[ejman]

There's no magic to Wellesley and Wellington, you can recreate a similar asset allocation from Vanguard index funds. Having said that my 403b has been 100% Wellesley for the past 10 years and I also have some in my IRA, mostly due to inertia. The fees are a bit high, but any young investor could do far worse than just put money into Wellington.

I've been trying to find an index fund in the Vanguard lineup that would match Wellesley's return and risk profile and have been unable to do so. Which fund or funds are you using that would recreate both the risk profile and the performance?

I'm particularly interested in alternatives since Wellesley is already 33% of my total liquid NW.

To the OP, I started investing in both Wellsi/Welltn in my late 30's and certainly don't regret that decision (I'm 63 now). Because of the significant distributions a tax deferred or a Roth account certainly makes sense.

 

[bUU]

Something I wasn't clear about early on, that perhaps might be something others would be interested to know or be reminded, is that Wellington and Wellesley aren't index fund based. They're all managed funds. Wellington, for example, is managed by Wellington Management, specifically Edward Bousa, on the equity side, and John Keogh, on the fixed-income side. It's managed as a typical managed balanced fund.

We're already in Wellington a bit, and it'll be where we shift money to, over time, as we need to push our asset allocation more conservative (we're 80/20 now) and as long as the fixed-income side of things is simply too screwed up for me to figure out how to navigate myself.

 

[ejman]

Something I wasn't clear about early on, that perhaps might be something others would be interested to know or be reminded, is that Wellington and Wellesley aren't index fund based. They're all managed funds. Wellington, for example, is managed by Wellington Management, specifically Edward Bousa, on the equity side, and John Keogh, on the fixed-income side. It's managed as a typical managed balanced fund.

Yes, that's the puzzling thing about these two funds. So far they seem to do very well versus all index funds I've compared them to that seem to have similar characteristics . Which is why I was intrigued by Nun's statement that there is nothing magic about them and they can be recreated by an index fund. I would love to find out the name of that index fund (s).

 

[tuixiu]

Yeah I think there is a disconnect there somewhat in that they are actively managed funds, not passively managed. If you did consider them an index fund equivalent based on asset class holdings I guess the biggest advantage of rolling your own would be lower expenses and being able to stack in taxable and tax deferred more efficiently for taxes.

 

[LOL!]

I would love to find out the name of that index fund (s).

How about this: VWELX is a mega/large-cap value fund with 55% US stocks, 10% foreign stocks, and 33% bonds with the rest as cash and unknown. The bonds appear to be medium quality and intermediate term.

So that means to get similar M* X-ray profiles, you need these Vanguard index funds:
40% MGV, 15% MGK, 11% VTRIX*, 33% VCIT and 1% VMMXX.

*EFV would make a better match, but is not a Vanguard fund.

 

[clifp]

Yes, that's the puzzling thing about these two funds. So far they seem to do very well versus all index funds I've compared them to that seem to have similar characteristics . Which is why I was intrigued by Nun's statement that there is nothing magic about them and they can be recreated by an index fund. I would love to find out the name of that index fund (s).

Most studies of index fund show they outperform 75-80% of actively managed funds. Wellesley and Wellington are the other 20%.


Given that Wellington was started right before the 1929 stock market crash, and has still has 8.31% return over the last 85 year, I suspect the secret is the organization. They have figured out how to outperform the market on risk adjusted basis. Now I know efficient market proponents don't believe that is possible, but I think they are wrong.

No guarantee the W&W magic won't disappear tomorrow..

 

[pb4uski]

Most studies of index fund show they outperform 75-80% of actively managed funds. Wellesley and Wellington are the other 20%.
...

+1 If you compare Wellesley and Wellington's performance to the VG Target Retirement funds with similar AA, Wellesley and Wellington have better performance IMO (tho for the last 5 years they seem to be pretty close).

 

[MBSC]

I've been trying to find an index fund in the Vanguard lineup that would match Wellesley's return and risk profile and have been unable to do so. Which fund or funds are you using that would recreate both the risk profile and the performance?

I created my own Wellesley fund through a combination of the Vanguard ETF 'VYM' and PenFed 3% 5-year CD's. VYM does not invest in foreign stocks but the large domestic names have an overseas presence.

 

[ejman]

OK, for the fun of it, I calculated the performance for 1,3, and 5 years for the versions from LOL! and SCGamecock.

Here is what I got:

LOL!: 1 yr 14.35%, 3 yr 10.81%, 5 yr 15. 3 % ( Note I assumed 7% 5 yr return for VCIT since 5 year data NA)

SCGamecock: 1 yr 13.19%, 3 yr 11.47%, 5 yr 15.19% (assumed Penfed CD would be 3% for each of the periods)

Wellington: 1 yr 14.42%, 3 yr 11.19%, 5 yr 15.88%

So, except for the 3 yr performance vs SCGamecock (11.47% vs 11.19%) it looks like Wellington is indeed in the 20% that Clifp refers to.

The disadvantages of LOL! approach is the annual rebalancing requirement + slight underperformance and for SCGamecock, the availability of CD's and the rates and penalties if one needs to cash early in order to rebalance, plus underperformance in the other time periods

 

[tulak]

Most studies of index fund show they outperform 75-80% of actively managed funds. Wellesley and Wellington are the other 20%.

This is what worries me about Wellesley. How do they manage to stay in the 20%. Will we see a decades long reversion to the mean?

I'm sticking with Wellesley, since it's done well for me. But I've read a few threads where people try to recreate Wellesley's performance using index funds and I haven't seen it done yet where they match Wellesley's performance.

 

[ejman]

I apologize for misreading SCGamecock response. I thought he was referring to a Wellington replacement but instead it is a Wellesley replacement.

Here are the corresponding numbers assuming a 35% VYM 65% Penfed CD:

1 yr 8.49%, 3 yr 7.56%, 5 yr 9.57%

Wellesley: 1 yr 7.75%, 3 yr 9.6%, 5 yr 13.21%

Wellesley's overperformance for 3 and 5 years is quite impressive.

 

[ejman]

This is what worries me about Wellesley. How do they manage to stay in the 20%. Will we see a decades long reversion to the mean?

I'm sticking with Wellesley, since it's done well for me. But I've read a few threads where people try to recreate Wellesley's performance using index funds and I haven't seen it done yet where they match Wellesley's performance.

That is exactly why I'm concerned since Wellesley is such a large portion of my liquid NW. And why I keep searching for a substitute but I want to have my cake and eat it too....

 

[RetireAge50]

We own 19 funds (across 6 different accounts) one of which is Wellington. Here are the 10 year results from each, interesting Wellington is in 6th place. Not bad since most of the other funds are 100% stock.

Our weighted average result is 8%, about the same as Wellington and better than S&P 500.

 

[prototype]

...... However, we are ready to move to more bonds (probably a 80/20 stocks/bonds mix) and are considering Wellington/Wellesley as part of this, .....

Wellington is about 65/35
Welllesley is about 35/65

Personally I like the funds, but I am retired and have a more conservative AA than the 80/20 you are looking at. Seems like Wellington may fit in, and if you put in enough dollars ($50K I think) you will get the Admiral fund which gets the fee down quite a bit (a couple of bps below 0.20) from the non-Admiral fund.

 

[Travelwanted]

Two points/questions:

1-I am trying to create my portfolio and will use - 65% equities, 35% bonds
VTSAX 50% (total stock market index)
VTIAX 25% (int'l stock index)
VTMSX 25% (tax managed small cap)
-------
VBTLX 20% (total bond)
VWIUX 40% (int term tax ex)
VMLUX 40% (limited term tax ex)

95% of our money is in taxable accounts so I am considering this instead of Wellington thinking it will be more tax-efficient, i.e. have a greater AFTER-tax return (i'm still w*rking and am in the top tax bracket). Thoughts?

2-from @retireage50's post: are any of you comfortable going almost "all-in" any one fund? If not, isn't there a lot of redundancy in your portfolio? I am not sure I want 95% of my money going only into to one fund.

 

[ejman]

Two points/questions:

1-I am trying to create my portfolio and will use - 65% equities, 35% bonds
VTSAX 50% (total stock market index)
VTIAX 25% (int'l stock index)
VTMSX 25% (tax managed small cap)
-------
VBTLX 20% (total bond)
VWIUX 40% (int term tax ex)
VMLUX 40% (limited term tax ex)

95% of our money is in taxable accounts so I am considering this instead of Wellington thinking it will be more tax-efficient, i.e. have a greater AFTER-tax return (i'm still w*rking and am in the top tax bracket). Thoughts?

2-from @retireage50's post: are any of you comfortable going almost "all-in" any one fund? If not, isn't there a lot of redundancy in your portfolio? I am not sure I want 95% of my money going only into to one fund.

It would certainly be more tax efficient to put the bond funds in tax deferred/ or Roth accounts.

I personally would not be comfortable putting all in a single actively managed fund. A single index fund such as a total stock market index would certainly be OK from a diversification standpoint. But to be totally honest putting everything in one fund with only one MF company somehow makes me uncomfortable (irrational I know, but that's how I feel)

 

[Travelwanted]

Of course it would be but as I mentioned 95% of our funds are in TAXABLE accounts. Hence the tax exempt bonds I have chosen for the taxable account. Hoping this will give better after tax return than Wellington could give me.

I'll put the other 5% of our funds,which are in IRAs, in bonds.

 

[clifp]

This is what worries me about Wellesley. How do they manage to stay in the 20%. Will we see a decades long reversion to the mean?

I'm sticking with Wellesley, since it's done well for me. But I've read a few threads where people try to recreate Wellesley's performance using index funds and I haven't seen it done yet where they match Wellesley's performance.

Perhaps but I doubt it. Here is what M* says about Wellesley.

Performance Pillar: Positive | Kevin McDevitt, CFA 03/24/2014
This fund faces potential headwinds, but its management and consistent strategy inspire confidence.
Since W. Michael Reckmeyer III and John Keogh formally took over this fund in mid-2008, the fund has gained 8.9% annualized through February 2014, which is 3.4 percentage points better than that of the typical conservative-allocation fund. The fund has also beaten the 7.8% annualized gain of its custom benchmark--65% Barclays U.S. Credit A or Better Index and 35% FTSE High Dividend Yield Index--since Reckmeyer and Keogh took over.
The fund has posted impressive longer-term returns with the same strategy, too. Dating back to its July 1970 inception, the fund has gained 10.1% annualized through February 2014, a good return for stocks, let alone a fund that owns a big slug of bonds as well.
The fund, however, has flourished during an extended period of generally falling interest rates dating back to the early 1980s, but it could struggle in relative terms when rates rise. Indeed, the fund lagged its average peer 8.2% to 12.6% annualized from July 1, 1970, through July 1, 1980, a period of generally rising interest rates.
This fund isn't doomed to disappoint, but investors shouldn't assume its very strong past performance predicts its future.



People Pillar: Positive | Kevin McDevitt, CFA 03/24/2014

It's been nearly six years since managers John C. Keogh and W. Michael Reckmeyer III took over here, and they have performed as expected. That speaks well of the depth of experience and skill at the fund's subadvisor, Wellington Management, and the care the firm takes with transitions. Both Keogh and Reckmeyer had invested for decades, including time working with the fund's previous fixed-income and equity managers, before taking the reins. Since then they've been tested by market extremes. They've been weighed, measured, and found sufficient.
Keogh and Reckmeyer both came aboard in 2008. Keogh has been running fixed-income portfolios for Wellington since 1983 and has been investing since 1979. He also runs the fixed-income portfolios of Vanguard Wellington VWELX and Hartford Balanced ITTAX. Reckmeyer worked with the previous stock manager of this fund, Jack Ryan, for more than a decade. He's been with Wellington since 1994 and has been investing since 1984. Reckmeyer also has also run Vanguard Equity Income VEIPX since 2008, as well as Hartford Balanced Income HBLAX, Hartford Equity Income HQIAX, and Hartford Value HVFAX

Both Wellington and Wellesley are value investor which historically has outperform other schools in investing. I suspect it will continue to do so, because it is hard since it involves buying unpopular stocks and bonds which generally continue to go down before they go up.

To best understand the concept of value investing. I recommend you read this classic talk given by Warren Buffett I think that Wellington Management folks are just slightly less successful members of the Super-investor group Buffett is talking about.

 

[Urchina]

I just wanted to thank everyone for the discussion. It's been helpful as we assess these funds for inclusion in our portfolio. I especially appreciate the effort to compare the returns of the suggested portfolios with Wellesley/Wellington -- very helpful! Thanks!

Now, I just have to decide which one -- Wellesley or Wellington. Since we won't be all-in in either, it probably is less of a concern so long as our AA balances out at the 80/20 we're going for.