Wellesley - Thoughts on the Fund

[chinaco]

I am in a similar position to Midpack. Planning how to manage assets through my distribution phase.

I have had a general plan about how to approach it and mitigate risks (both investment and life event).

An alternate approach I have been mulling over would involve a significant chunk of assets (50% of total assets which would be held in IRAs) in the Wellesley Fund which is an actively managed balanced fund (40/60) that is generally investing in LCV stocks and Int Term Bonds.

• Has anyone done a historical study of the returns and how the fund has held up (in terms of investment)? The fund seems to throw off a nice dividend and Cap Gain yearly.
• The fund managers have changed recently. Does VG use a committee approach to making investment decisions (as opposed to 1 guy in a cube... which would be a little disconcerting)?

Would you be comfortable holding 50% of your assets in the Wellesley fund during the distribution phase of your retirement (next 30 to 40 years)? Why or why not?

 

[W2R]

I am the biggest Wellesley fan ever, but even I would not put more than 30% in Wellesley (or any other fund).

Also, I think you should plan on reinvesting the long term capital gains, and living off the dividends.

I have looked at Wellesley's historical dividends, and while they vary they seem pretty good. Sometimes the dividend will come up low or even zero for a quarter, but then the next time makes up for it. I computed the total YEARLY dividends for VWINX for the last 18 years (but beware, check yourself before taking this as gospel - - they are available on yahoo finance):

2009 2.202
2008 2.439
2007 1.198
2006 1.588
2005 1.252
2004 0.878
2003 0.870
2002 0.910
2001 1.867
2000 1.460
1999 2.365
1998 2.270
1997 2.645
1996 1.760
1995 1.420
1994 1.350
1993 1.540
1992 1.420

The lowest dividend for Wellesley's Admiral fund VWIAX since inception in 2001 was $0.00
The highest dividend for Wellesley's Admiral fund VWIAX since inception in 2001 was $2.29
Yearly running means for VWIAX: minimum 1.61, maximum 4.19

Wellesley is run by Wellington Management, which has been running the Wellington fund since the 1920's. Still, both are active funds so there are no guarantees for the future.

 

[chinaco]

I am the biggest Wellesley fan ever, but even I would not put more than 30% in Wellesley (or any other fund).

...

Good point. But is that to mitigate risk of a concentrated investment, manager/managing company risk, or both.

 

[W2R]

Good point. But is that to mitigate risk of a concentrated investment, manager/managing company risk, or both.

A fund with this many different holdings is theoretically diversified at least somewhat, though not entirely. I think it's a truism that (especially with managed funds) it is foolish to invest more than 25%-30% in any one fund, for the reasons you mentioned and a number of others. This is not an unusual idea and can be found in most of your investment books. Would you REALLY think it was a great idea to put all of your eggs in one basket??

Past performance is no guarantee of future results, y'know?

Aargh. Where's my coffee...

 

[chinaco]

A fund with this many different holdings is theoretically diversified at least somewhat, though not entirely. I think it's a truism that (especially with managed funds) it is foolish to invest more than 25%-30% in any one fund, for the reasons you mentioned and a number of others. Would you REALLY think it was a great idea to put all of your eggs in one basket?? This is not an unusual idea and can be found in most of your investment books.

Past performance is no guarantee of future results, y'know?

Yes, good point. A major concern would be manager/management company related risk.

Wellesley also seems to hold a concentration in fairly small number of stocks (50 at this time). But that is OK. it would represent the LC Domestic allocation.

 

[W2R]

Yes, good point. A major concern would be manager/management company related risk.

Wellesley also seems to hold a concentration in fairly small number of stocks (50 at this time). But that is OK. it would represent the LC Domestic allocation.

Well, it is your money and your life. Before you do something that could be considered rash, I would suggest reading further on the Bogleheads book list. I am half asleep and not inclined to argue something this fundamental - - perhaps these books can persuade you as they did me.

It is your money, and you can invest it in any way you please.

But good gosh.

 

[REWahoo]

Would you be comfortable holding 50% of your assets in the Wellesley fund during the distribution phase of your retirement (next 30 to 40 years)? Why or why not?

I currently hold ~40% of our assets in Wellesley. I'm five years into the distribution phase and have been tempted to increase it to 50% but am a bit uncomfortable having too much of my nest egg in any one fund.

 

[smjsl]

The fund managers have changed recently.

What good are historical results if fund management recently changed? Who cares if it's under the same "company name"? Why even put 1 penny into a fund where management just changed? Only reason I can think of is if you check out performance history / style / etc of new decision makers, not of the fund to which they switched. (Disclaimer: based on your question, I am assuming you believe in active management over passive one.)

 

[chinaco]

Well, it is your money and your life. Before you do something that could be considered rash, I would suggest reading further on the Bogleheads book list. I am half asleep and not inclined to argue something this fundamental - - perhaps these books can persuade you as they did me.

It is your money, and you can invest it in any way you please.

But good gosh.

Thanks for the feedback. I have not problem with candid feedback. That is what I am want.

If you look at my OP, I stated that I am considering some alternatives to my current plan.

My current plan has the assets spread across many funds. It was designed to mitigate certain risks (including too much concentration). But spreading it out creates a little more difficulty managing it (although my current plan has that mostly covered). I am considering some other options to compare and contrast the benefit/risks.

 

[W2R]

I am the biggest Wellesley fan ever, but even I would not put more than 30% in Wellesley (or any other fund).

I currently hold ~40% of our assets in Wellesley. I'm five years into the distribution phase and have been tempted to increase it to 50% but am a bit uncomfortable having too much of my nest egg in any one fund.

I was wrong!! I am NOT the biggest Wellesley fan ever, after all!

I still think that investing more than 30% in any one fund is pushing it (despite the fact that most of my income is from Wellesley). Actually as of yesterday I had 30.22% Wellesley and was feeling guilty about it.

 

[FIRE'd@51]

Also, I think you should plan on reinvesting the long term capital gains, and living off the dividends.

I have looked at Wellesley's historical dividends, and while they vary they seem pretty good. Sometimes the dividend will come up low or even zero for a quarter, but then the next time makes up for it. I computed the total YEARLY dividends for VWINX for the last 18 years (but beware, check yourself before taking this as gospel - - they are available on yahoo finance):

2009 2.202
2008 2.439
2007 1.198
2006 1.588
2005 1.252
2004 0.878
2003 0.870
2002 0.910
2001 1.867
2000 1.460
1999 2.365
1998 2.270
1997 2.645
1996 1.760
1995 1.420
1994 1.350
1993 1.540
1992 1.420

Just a couple of points. The dividends shown on Yahoo are actually total distributions (which include capital gains), so that data may be misleading if you plan to reinvest the capital gains part and withdraw the dividends.

Secondly, your data for 2008 and 2009 appear to be the dividends for the Admiral shares (VWIAX, not VWINX).

 

[W2R]

Just a couple of points. The dividends shown on Yahoo are actually total distributions (which include capital gains), so that data may be misleading if you plan to reinvest the capital gains part and withdraw the dividends.

Oops, you're right. I did the 1992-2007 sums back in 2007 when I first bought Wellesley, and had forgotten that.

Secondly, your data for 2008 and 2009 appear to be the dividends for the Admiral shares (VWIAX, not VWINX).

Yep, you're right. I added them up while writing this post. Oh well! (where's that coffee!! ) Seems like I should just go back to bed this morning.

 

[Rich_by_the_Bay]

My take on this is that even if you are comfortable with Wellesley, a balanced type fund has some disadvantages in the decumulation phase: you cannot sell stocks v. bonds selectively -- it's always 40:60. If you hit a bad patch and want to leave stocks alone til they recover (even for a few years at a time), you'll be selling low if you sell shares of Wellesley. A separate fund for stocks and bonds allows you to rely on bonds exclusively for a while.

W2R's point about living off the dividends is good advice, but in effect I think you are still effectively selling stocks preferentially by not reinvesting the dividends (in terms of total returns).

OTOH, if you also have sufficient assets outside of Wellesley (including cash and STB), W could make a great income fund which you could occasionally let rest by living off your cash for a while til stocks (including .4 of wellesley) recover from a bear market.

Just my perspective - hope that helps.

 

[W2R]

My current plan has the assets spread across many funds. It was designed to mitigate certain risks (including too much concentration). But spreading it out creates a little more difficulty managing it (although my current plan has that mostly covered). I am considering some other options to compare and contrast the benefit/risks.

My current plan only includes a half dozen funds all in all. I hear you about the hassles of managing a complex plan! I just don't like giving more than I can afford to lose, to a single actively managed fund so I stick to the "no more than 25%-30% in any one fund" idea that to me, seemed prudent.

 

[Gone4Good]

There's nothing really magical about Wellesley. You can get basically the same yield with a 60% allocation to the Investment Grade Bond Index and a 40% allocation to the S&P Index (3.19% vs. 3.27%).

You buy Wellesley if you think portfolio managers add Alpha. If not, build your own with the index funds.

And I second Rich's comments.

 

[FIRE'd@51]

W2R's point about living off the dividends is good advice, but in effect I think you are still effectively selling stocks preferentially by not reinvesting the dividends (in terms of total returns).

I don't understand this. If you withdraw the dividend portion of the total distribution, you are withdrawing the dividends and interest paid by the stocks and bonds in Wellesley's portolio. This is no different than living off the dividends and interest paid by individual stocks and bonds in your portolio. Nothing is being sold off.

 

[Gone4Good]

I don't understand this. If you withdraw the dividend portion of the total distribution, you are withdrawing the dividends and interest paid by the stocks and bonds in Wellesley's portolio. This is no different than living off the dividends and interest paid by individual stocks and bonds in your portolio. Nothing is being sold off.

True, but in a 60% bond portfolio a big part of the dividend is inflation compensation. Consume that, and you're effectively consuming principal.

 

[FIRE'd@51]

True, but in a 60% bond portfolio a big part of the dividend is inflation compensation. Consume that, and you're effectively consuming principal.

Is this necessarily the case? Historically, stocks have returned about 10% nominally per year. Of that 10%, approximately 3% has come from dividends and 7% from appreciation. If you hold 40% stocks in a portfolio, the total portfolio will appreciate at about 40% of 7% annually, or nearly 3% per year. This will grow your total portfolio at roughly the inflation rate we all tend to use for the long-term. If you have a different inflation forecast, you can adjust this ratio accordingly by combining a diversified stock portfolio with a diversified bond portfolio in the manner that you have suggested above.

 

[Gone4Good]

Is this necessarily the case? Historically, stocks have returned about 10% . . . .

Also true. Capital appreciation can compensate for the bond principal you consume. But it is important for people to appreciate this subtlety.

 

[REWahoo]

Historically, stocks have returned about 10% nominally per year. Of that 10%, approximately 3% has come from dividends and 7% from appreciation. If you hold 40% stocks in a portfolio, the total portfolio will appreciate at about 40% of 7% annually, or nearly 3% per year. This will grow your total portfolio at roughly the inflation rate..

I believe this describes the underlying basic strategy of Wellesley, which is described as an income fund. In theory you should be able to spend the dividends while keeping up with inflation.

I repeat: in theory.

 

[W2R]

I believe this describes the underlying basic strategy of Wellesley, which is described as an income fund. In theory you should be able to spend the dividends while keeping up with inflation.

I repeat: in theory.

Besides, if you have 70% in other funds that are growing at rates exceeding inflation, and then rebalance each year, their increase should bolster up Wellesley anyway if there are any problems with inflation.

 

[REWahoo]

Besides, if you have 70% in other funds that are growing at rates exceeding inflation, and then rebalance each year, their increase should bolster up Wellesley anyway if there are any problems with inflation.

Hey, back off - or I'll bring up your [-]coprophobia[/-] chorophobia problem...

 

[W2R]

Hey, back off - or I'll bring up your [-]coprophobia[/-] chorophobia problem...

You [-]sewage rats[/-] RV owners must be really good sports, since you do seem to have a lot of fun considering what you spend your free time doing. (ugh!)

 

[clifp]

I was surprised when I looked up Wellesley that fund managers are relatively recent. 2007 for the equity manager and 2008 for the fixed income manager. This being a Vanguard fund I won't be overly concerned but for a semi-active fund the management would matter.

Here is what Morningstar says about the fund managers

Strategy
W. Michael Reckmeyer III, who runs the equity portion of the fund, is a yield-oriented contrarian. The fund typically has little exposure to growth-oriented sectors such as technology. The fund's bond stake (about 60% of assets) is run by Wellington Management's John Keogh, who keeps the portfolio concentrated in higher-quality issues. The fund often has a longer duration, a measure of interest-rate sensitivity, than many of its peers, leaving it vulnerable to rising rates.

Management
This fund has a relatively new, but still experienced, management. John Keogh replaced Earl McEvoy, who had been running the fixed-income portfolio for decades, in June 2008. He's a veteran bond manager who also runs the fixed-income side of Vanguard Wellington VWELX. W. Michael Reckmeyer III, who had worked with previous stock manager Jack Ryan on this fund for more than a decade, took over in June 2008. Like Ryan, Reckmeyer also runs part of Vanguard Equity-Income VEIPX.

 

[IndependentlyPoor]

Well, in light of the new managers historical data is pretty irrelevant, but I ran some numbers anyway. Here is a risk/return chart for Wellesley and several other funds for comparison. The horizontal axis is the standard deviation of the percentage daily change of the NAV. The vertical axis is the equivalent APR return for the time period. I began the time period at the earliest date for which data is available for all of the funds - July 1996.
The symbols are:
VWINX - Wellesley Income
VBMFX - Total Bond Index
VTSMX - Total Stock Index
VGTSX - Total International Stock Index
VEIPX - Equity Income
I didn't include TIPS (VIPSX) because it lands almost on top of VBMFX.



You can see that Wellesley does pretty well. Higher return than Total Bond with only a little more volatility. Better return and significantly less volatility than Equity Income.

I don't own Wellesley now, but I did have a little of it in my Mother's portfolio for years. I was always surprised at how well it performed. I should have bought more.