Wellsley VWINX - Inflation Spectre

[MichealKnight]

I have zero experience or training to know if inflation is going to get really bad. But, I do feel that energy demand may not go away soon, and higher wages - are a fixture that will stay so if energy and labor costs more, stuff is gonna cost more, not to mention QE-whatever isn't stopping.

Theory is to be out of fixed-income if you feel inflation is going to be high.

VWINX is a fund I really like for my style, my needs and goals. I love how historically it's performed especially in down markets. The diversification, the high quality boring stocks - all my cup of tea.

But...it's 60% BONDS.

If inflation is here to stay and getting higher....is VWINX still a good place to be?

FWIW all the billionaire investor gurus on CNBC last week claim to be investing for inflation.....

 

[SecondAttempt]

I have a similar concern. I am not necessarily worried about inflation but I do expect interest rates to start moving up in a year or so. That would also be bad for bonds and hence VWINX.

 

[ejman]

Well, you could switch over to Wellington that has a similar investment philosophy but 40% bonds. I own both in my portfolio (Mostly in IRA's, they both generate a fair amount of dividends and cap gains) to the tune of about 40% of my portfolio. I have no intention of switching out of either one of them. Their management over the years has shown an ability to deliver good results in all kinds of weather and I am pretty certain that they have analyzed the current environment to a far greater extent than I am capable of. I'm going to let them do their job and I'll just stick to my asset allocation. I've been ER'd for 21 years now. The few times over my investment career of close to 40 years I've let emotion or the thought I know more than the next fellow guide my investment I've been bitten in the a$$ -hard.

 

[REWahoo]

It might be informative to take a look at how Wellesley performed during the last period of high inflation/high interest rates - from 1973 through 1982. I found this old spreadsheet that shows the fund's annual returns for each of those years.

EDIT: Added the performance of the S&P 500 for comparison.

Top image = S&P 500, bottom image = Wellesley

 

[NW-Bound]

I entered the above return figures into a spreadsheet, and computed the cumulative return of the S&P and Wellesley over the decade of 1973-1983 as follows, for an initial investment of $10K.

Year	S&P	Wellesley
1973	10,000	10,000
1974	8,534	9,640
1975	6,275	9,013
1976	8,609	10,591
1977	10,662	13,058
1978	9,896	13,620
1979	10,546	14,110
1980	12,490	14,985
1981	16,539	16,768
1982	15,727	18,227
1983	19,117	22,474

Wellesley did a lot better than anyone would have guessed.

Still, before you say a 2.2X gain in 10 years is nice, I hasten to point out that the cumulative inflation was so bad that you need $23,000 in Jan 1983 to buy the same things you could with $10,000 in Jan 1973.

High inflation is very bad. If you can keep up with it, that's an accomplishment already, let alone real gain.

 

[VanWinkle]

I entered the above return figures into a spreadsheet, and computed the cumulative return of the S&P and Wellesley over the decade of 1973-1983 as follows, for an initial investment of $10K.

Year	S&P	Wellesley
1973	10,000	10,000
1974	8,534	9,640
1975	6,275	9,013
1976	8,609	10,591
1977	10,662	13,058
1978	9,896	13,620
1979	10,546	14,110
1980	12,490	14,985
1981	16,539	16,768
1982	15,727	18,227
1983	19,117	22,474

Wellesley did a lot better than anyone would have guessed.

Still, before you say a 2.2X gain in 10 years is nice, I hasten to point out that the cumulative inflation was so bad that you need $23,000 in Jan 1983 to buy the same things you could with $10,000 in Jan 1973.

High inflation is very bad. If you can keep up with it, that's an accomplishment already, let alone real gain.

Thanks NW-Bound, nice chart!!

 

[Lsbcal]

Here is a view of the various asset classes for the 1970's period:

LCB = large cap blend, SP500

As you can see midcap and small cap value did best in this period.

Wellington's stocks are characterized as LCV (large cap value) by Vanguard. That is about 65% of VWENX's portfolio.

 

[ejman]

I entered the above return figures into a spreadsheet, and computed the cumulative return of the S&P and Wellesley over the decade of 1973-1983 as follows, for an initial investment of $10K.

Year	S&P	Wellesley
1973	10,000	10,000
1974	8,534	9,640
1975	6,275	9,013
1976	8,609	10,591
1977	10,662	13,058
1978	9,896	13,620
1979	10,546	14,110
1980	12,490	14,985
1981	16,539	16,768
1982	15,727	18,227
1983	19,117	22,474

Wellesley did a lot better than anyone would have guessed.

Still, before you say a 2.2X gain in 10 years is nice, I hasten to point out that the cumulative inflation was so bad that you need $23,000 in Jan 1983 to buy the same things you could with $10,000 in Jan 1973.

High inflation is very bad. If you can keep up with it, that's an accomplishment already, let alone real gain.

Good chart NW-Bound. The big question of course is to what extent current situation rhymes. Interest rates were vastly higher during that period so that helped Wellesley's return a lot. On the other hand the high bond allocation usually means that when the stock market drops big, bonds will be impacted to a much lesser degree. One interesting thing. Wellesley (during that period) kept up with inflation better than stocks. Counter intuitive no?

 

[Chuckanut]

. Interest rates were vastly higher during that period so that helped Wellesley's return a lot.

+1

The Feds were not holding interest rates down like they are today. That's why I had several laddered 10 year Treasuries in double digits. I cried when they matured.

 

[REWahoo]

Interest rates were vastly higher during that period so that helped Wellesley's return a lot.

Higher inflation appears to be just warming up. Who knows what the Fed will do with interest rates over the next decade.

 

[ejman]

Higher inflation appears to be just warming up. Who knows what the Fed will do with interest rates over the next decade.

Fair enough. If memory serves Fed Chairman Volcker controlled inflation by vastly increasing interest rates back then. I remember buying a house in 1979 and thinking that the 10.5% mortgage rate was entirely reasonable.

 

[Lsbcal]

...
VWINX is a fund I really like for my style, my needs and goals. I love how historically it's performed especially in down markets. The diversification, the high quality boring stocks - all my cup of tea.

But...it's 60% BONDS.

If inflation is here to stay and getting higher....is VWINX still a good place to be?

FWIW all the billionaire investor gurus on CNBC last week claim to be investing for inflation.....

Part of this depends on the active management skills at Wellington. We have had decades of downward trending interest rates as everyone knows. Maybe the Fed manages this by upward trending rates but at such a slow pace as to make bond duration risk less of a factor? Just a guess but who understands rates and inflation ... not me.

FWIW, I think midcap and small cap value stocks are a good deal here. That is based on PE history for those sectors too. Neither Wellesley nor Wellington have much exposure to these sectors. If one Wellesley or Wellington I'd spread my bets more to pick up exposure to the other asset classes.

 

[ncbill]

Here is a view of the various asset classes for the 1970's period:

LCB = large cap blend, SP500

As you can see midcap and small cap value did best in this period.

Wellington's stocks are characterized as LCV (large cap value) by Vanguard. That is about 65% of VWENX's portfolio.

IIRC, on Paul Merriman's website the portfolio that did the best in backtesting was a blend of 50% SCV / 50% LCV.

Of course, value hasn't done much of anything over the last decade.

 

[Lsbcal]

IIRC, on Paul Merriman's website the portfolio that did the best in backtesting was a blend of 50% SCV / 50% LCV.

Of course, value hasn't done much of anything over the last decade.

My investment style is not a buy hold one but I would opt for 50% SCV / 50% MCV. That has done better in the last 25 years or so then using the LCV asset class. And it appears MCV did better then LCV in the 1970's as well. But I do these things based on the overall portfolio plan and not just in isolation.

The fact that value has been a poor 2nd to growth over the last decade could be a clue ... maybe. PE's as shown above for value have actually gone down over the decade whereas they have gone up for growth. I don't pretend to know what is coming in the future and I employ my own brand of trend following in tax advantaged accounts to move with the times. Not recommending for anyone here though as most are buy hold investors which is fine too.

 

[Lsbcal]

Here is something that is relevant to this discussion that I posted elsewhere:

Value stock PE's are much less inflated relative to the past 10 years. Here is my data for PE comparisons of Vanguard funds. I usually do this data collection once a year so the last column is for the ratio of the fund's current average PE to the average PE ratio for the last 11 years.

 

[NW-Bound]

Good chart NW-Bound. The big question of course is to what extent current situation rhymes. Interest rates were vastly higher during that period so that helped Wellesley's return a lot. On the other hand the high bond allocation usually means that when the stock market drops big, bonds will be impacted to a much lesser degree. One interesting thing. Wellesley (during that period) kept up with inflation better than stocks. Counter intuitive no?

Thanks to ReWahoo's posted data, I was astonished to learn Wellesley did so well.

I don't know how it will work out this time, but it is going interesting to see. Never a dull moment.

Even before 1973, inflation already started to rise. A lot of bad things were going on before my time as an investor, such as the Vietnam War, and the oil embargo.

Year	Inflation
1968	4.3%
1969	5.5%
1970	5.8%
1971	4.3%
1972	3.3%
1973	6.2%
1974	11.1%
1975	9.1%
1976	5.7%
1977	6.5%
1978	7.6%
1979	11.3%
1980	13.5%
1981	10.3%
1982	6.1%
1983	3.2%
1984	4.3%

Here's the historical data on various rates for a perspective.

I started working full-time in 1980, right at the time Volker, the Fed chairman then, raised the hell out of interest rate to slay inflation, and he surely succeeded. My 1st mortgage was in April 1980, and I paid 14% for an FHA loan. Don't remember if the 0.5% mortgage insurance was already included, or added on top of it.

 

[Lsbcal]

...

Even before 1973, inflation already started to rise. A lot of bad things were going on before my time as an investor, such as the Vietnam War, and the oil embargo.
...

And the small matter of Watergate.

 

[SecondAttempt]

So something I almost never see discussed is what caused the high inflation of the 1970s and early 80s. I read a book by Volker years ago where he blames it on going off the gold standard and the fact the the US had racked up serious hidden debts to mainain European military bases for 30+years after WW2. I don't have a way to judge if this is correct except by accepting the claims of one of teh only people who would know. But it explains a lot including why we did not see big inflation when the Fed wound up h eprinting presses in 2008.

 

[target2019]

I have zero experience or training to know if inflation is going to get really bad. But, I do feel that energy demand may not go away soon, and higher wages - are a fixture that will stay so if energy and labor costs more, stuff is gonna cost more, not to mention QE-whatever isn't stopping.

Theory is to be out of fixed-income if you feel inflation is going to be high.

VWINX is a fund I really like for my style, my needs and goals. I love how historically it's performed especially in down markets. The diversification, the high quality boring stocks - all my cup of tea.

But...it's 60% BONDS.

If inflation is here to stay and getting higher....is VWINX still a good place to be?

FWIW all the billionaire investor gurus on CNBC last week claim to be investing for inflation.....

VWINX has a target of 65% bonds.

As pointed out by others Wellesley (VWINX) has performed well. I don't think BOND is a bad word when INFLATION kicks up. But I've had a nagging feeling about our bond allocation when interest rates went to zero.

I'm ok with 11-12% of invested accounts in Wellesley today. That is about 2X's what we have in US Total Bond. The ratio of Wellesley to Total Bond has been increasing for several reasons, one being that we rebalance into Wellesley now instead of Total Bond.

On the way to retirement we increased bond allocation each year. In early stage of retirement we are at 50% bond and income. Now with inflation returning I am leaning towards letting the equity allocation drift higher, and re-evaluating when we get to 40% bond.

 

[Time2]

Fair enough. If memory serves Fed Chairman Volcker controlled inflation by vastly increasing interest rates back then. I remember buying a house in 1979 and thinking that the 10.5% mortgage rate was entirely reasonable.

It was, when compared to 83/84s 16-3/4% mortgage. I chose a 13-3/4% three year balloon mortgage.

 

[ncbill]

It was, when compared to 83/84s 16-3/4% mortgage. I chose a 13-3/4% three year balloon mortgage.

I remember one of my professors claiming he paid 4 points to buy down the mortgage to 14%...of course, a 4 bedroom, 3 bath home was probably around $50k at that time.

 

[NW-Bound]

I remember one of my professors claiming he paid 4 points to buy down the mortgage to 14%...of course, a 4 bedroom, 3 bath home was probably around $50k at that time.

I paid $65K for my 1st home in 1980. 4BR, 2BA. There were some points, but I forgot how much. The assumable FHA interest rate was 14%, and there might have been another 0.5% mortgage insurance on top of it. I refinanced a couple of times, before selling it in 1986 for $95K.


PS. $65K then is $220K now with inflation. I just looked on Zillow, and it said $389K.

 

[Chuckanut]

So something I almost never see discussed is what caused the high inflation of the 1970s and early 80s. I read a book by Volker years ago where he blames it on going off the gold standard and the fact the the US had racked up serious hidden debts to mainain European military bases for 30+years after WW2. I don't have a way to judge if this is correct except by accepting the claims of one of teh only people who would know. But it explains a lot including why we did not see big inflation when the Fed wound up h eprinting presses in 2008.

Two oil embargoes probably had a lot to do with it. Our vulnerability to foreign energy sources was down right scary.

The first in 73-74 was mostly the Arab member of OPEC who were angry at countries that supported Israel in a recent war. Interestingly, Iran which is not an Arab, country did not participate. They just made a bundle off of the inflated price of oil. 99.9 was seen for the first time at many gas stations. Many pumps could not handle prices of $1+ so the owners set the price at the pump at 50% and then doubled the charge when you paid. (None of this automated payment at the pump back then.) Fun?

1979's embargo followed the Iranian revolution. Iranian oi production fell quite a bit, prices went up, gas lines returned. Were we having fun yet?

What does this have to do with Wellesley? I supposed it would be interesting to see how it and similar funds did during these crises. 73-74 saw a 40% drop in the market. IIRC, the market did not return to break even in real terms for about 18 years. Were we still having fun?

 

[ejman]

Two oil embargoes probably had a lot to do with it. Our vulnerability to foreign energy sources was down right scary.

The first in 73-74 was mostly the Arab member of OPEC who were angry at countries that supported Israel in a recent war. Interestingly, Iran which is not an Arab, country did not participate. They just made a bundle off of the inflated price of oil. 99.9 was seen for the first time at many gas stations. Many pumps could not handle prices of $1+ so the owners set the price at the pump at 50% and then doubled the charge when you paid. (None of this automated payment at the pump back then.) Fun?

1979's embargo followed the Iranian revolution. Iranian oi production fell quite a bit, prices went up, gas lines returned. Were we having fun yet?

What does this have to do with Wellesley? I supposed it would be interesting to see how it and similar funds did during these crises. 73-74 saw a 40% drop in the market. IIRC, the market did not return to break even in real terms for about 18 years. Were we still having fun?

From the chart posted previously by ReWahoo, Wellesley dropped 3.6% in 1973 and 6.5% in 1974. It went up 17.5% in 1975

 

[Gazingus]

Why did VWINX drop 4.4 % yesterday?