Balanced funds are mandated to invest in both equities and fixed-income positions. Not surprisingly, they’ve traditionally been the funds of choice for conservative investors who seek some income, suggests Genia Turanova, editor of Leeb Income Performance.
But they’re also a fine alternative to fixed-income funds for some exposure to bonds. Balanced funds with a conservative-allocation profile typically invest about two-thirds of their total assets in fixed-income assets, with the rest dedicated to equities.
This mix is appropriate for most economic environments, keeps volatility down, and reduces the need to guess and market-time.
Vanguard Wellesley Income (VWINX) fund, invests about 60% of its assets in bonds, below average for the group. Rated five-stars and gold by Morningstar, the fund takes an active management approach to both portfolio segments and has remained very close to a 60-40 allocation over the years.
The bond holdings, of course, make the overall portfolio interest-rate sensitive. Last year, the fund’s performance benefited from declining rates, but once rates rise, the portfolio’s bond portion will lose value.
But the fund’s experienced managers have prepared for this by making fixed-income choices with an average credit quality of A and an average effective duration of 6.2 years. These characteristics keep interest-rate sensitivity to a moderate level and give the fund a leg up on most of its peers.
The fund’s equity portion is well diversified. Of the 60 positions, the top ten—which include Wells Fargo (WFC), Microsoft (MSFT), Merck (MRK), and Johnson & Johnson (JNJ)—account for only 14.9% total assets.
Inaugurated in 1975, the fund is actively managed by two managers from the Wellington LP sub-advisor (which began in 1928), at the helm since 2008 and 2007.
They have presided over strong performance: the fund is in the eighth percentile of its peer group for the last five years, the 11th percentile for the last three years, and the top 7% for the latest one-year period, with a total return of 8.07% for 2014.
The fund’s longer-term record is stellar: the second percentile for the last ten years and fifth percentile for the last 15 years. The yield is 3.1% and the expense ratio a rock-bottom 0.25%. This fund remains a strong recommendation.
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