Wellsley Fund

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Wellsley Fund

Postby jamesdz » Sat Mar 09, 2013 7:21 am

Dear Bogleheads,
I am invested in VNG Wellsley (65% Bonds/35% Stock), Wellington (35% Bonds/65% Stock) as well as a variety of VNG Index Funds (S&P500, Mid Cap, Small Cap, Lifestrategy Growth). I have sufficient investment in bonds - municipal & short/mid-term commercial bonds - to feel that I have this base covered.
Wellsley fund appears to be "underperforming" my other VNG investments over the last 6-12 months which I attribute to the
65% bond component & I am thinking of exchanging a portion of Wellsley for Wellington or spreading over current VNG Index
funds.
Questions:
a) Any comments on my current thoughts re the Wellington Fund ? Don't like to be viewed as a "market timer" but prevailing
wisdom seems to be that bonds will underperform stocks over both the short & longer term.
b) Any advantage/disadvantage to making an exchange prior to the declared dividend date of record (3/28) on the Wellsley Fund ?
Thank you.
Jim D
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Re: Wellsley Fund

Postby BBL » Sat Mar 09, 2013 7:42 am

You described performance chasing. That's generally frowned upon as an investment strategy. You are proposing to increase your equity AA. What has changed, other than the underperformance of Wellesely relative to Wellington and other equity funds, to prompt this change?

I can't read this question without seeing the performance chasing/recency that are likely behind it.

Do you use an IPS and are you revising it to adjust to a higher equity allocation? You post makes me nervous. Absent more information it appears you are considering strategic changes based on recency. I would take a step back before acting on this notion.

If you have a written plan, what does it say? If you don't this is a good example of why you should consider developing one. Looking back at 6-12 months is not a good way to adjust your portfolio. Viewing each piece in isolation isn't a good idea either. There is always something in the portfolio underperforming on a relative basis but abandoning the relative underperformer for the relative outperformers is a bad strategy and you will be unhappy with the results long term. Please take your time and reconsider this.
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Re: Wellsley Fund

Postby billyt » Sat Mar 09, 2013 7:58 am

It is interesting how similar the returns of Wellington and Wellsley have been since Wellsley's start in 1970, especially since there allocations are so different (65/35; 35/65). Have a look at a morningstar growth chart, I am not sure how to post it.
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Re: Wellsley Fund

Postby nisiprius » Sat Mar 09, 2013 8:10 am

1) Since you already have a mix of many funds, including individual index funds that target specific asset subclasses, if you do want to do "tactical asset allocation," tuning the proportions of stocks and bonds in your portfolio in response to market conditions, that might mean that you are a sophisticated enough investor that you would be better off taking the direct reins and going entirely to using separate mutual funds for stocks and bonds rather than adjusting the mix between Wellesley and Wellington.

Your holdings seem like a sort of mish-mash of overlapping offering to me--don't let that sting, mine were the same way for a long time and I don't think it did me any particular harm, but it doesn't lead to clear thinking. I don't think it makes sense to have more than one all-purpose balanced fund-of-funds offerings--in your case, Wellesley, Wellington, and LifeStrategy.

Even if the only two funds you held were Wellesley and Wellington, a large change in their relative proportions would make only a small change on your stocks/bonds allocation. If you actually believe in and care about their active management... you might say "I want more violins so I'll mix in more Philadelphia Orchestra and less New York Philharmonic," but you also get a different conductor.

2) You say "prevailing wisdom seems to be that bonds will underperform stocks over both the short & longer term." Well, that has always been the prevailing wisdom. Stocks are supposed to outperform bonds. That's what the risk premium is about. So why does anyone hold bonds at all? That's what the risk premium is all about, you can't get the risk premium without really taking the risk. You have to stop asking what you predict for the price movements of bonds, and ask why you have them in the first place. The prevailing wisdom is also that bonds have less risk than stocks over both the short and longer term.

3) Probably always, but certainly now, attempts to hash out what direction to dodge in are ill-advised. We always get a mass of conflicting signals, and the danger is that one will choose a direction based on emotional considerations, and then filter the information to see only the signals that happen to point the way we feel like going anyway. Ignoring enthusiasts and promoters, the consensus long-term view from people who seem to be knowledgeable is that stocks and bonds are both in for a long spell of lower-than-historical returns. Well, stuff happens. Better to accept that than to listen to promoters of weird stuff we'd never have considered normally.

4) Tactical asset allocation was all the range 15-20 years ago, and there were numerous tactical asset allocation funds that offered to do it for you. Investment ideas never go away, but these funds as a class pretty well systematically underperformed those that just held steady, and you don't hear much about them any more. One of Larry Swedroe's books has some absolutely devastating statistics about them. You'll notice that although they actively manage the stocks and bonds in the portfolio, neither Well[b]esley nor Wellington tries to do tactical asset allocation[/b]. If they don't think it's a good idea, why are you trying to do it for them? Vanguard used to have a tactical asset allocation fund, which they used as a component of their LifeStrategy funds. That fund has been terminated and the LifeStrategy funds now have unchanging, locked-down stock/bond allocations.
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Re: Wellsley Fund

Postby Trev H » Sat Mar 09, 2013 8:20 am

You really need to compare Wellesley to other funds with similar stock/bond ratio's...

Code: Select all
Fund.........YTD....1YR....5YR...10YR
=====================================
Wellesley...2.86...9.54...7.94...7.64
TR Income...1.72...5.79...5.33.......
TR 2010.....2.78...6.87...5.00.......
LS Inc......0.91...4.78...4.40...5.52
LS CG.......2.59...6.52...4.25...6.49
=====================================


When stocks are on a roll... conservative/income type funds are going to lag compared to others wtih higher equity allocation.

Wellesley is actually perfoming great compared to Vanguards other offerings wtih similar stock/bond ratio's.

It sounds to me like you need to decide on your asset allocation and stick with it... avoid the temptation to lean towards what is currently doing best and maintain diversifucation.

Good Luck !

Trev H
Last edited by Trev H on Sat Mar 09, 2013 8:23 am, edited 1 time in total.
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Re: Wellsley Fund

Postby bertilak » Sat Mar 09, 2013 8:21 am

Jamesdz,

Wellesely is doing exactly what it is designed to do. Look at this chart comparing Wellesely to Wellington over 10 years. Blue is Wellington, orange is Wellesely. The important thing to note is that Wellesely does not wiggle up and down as dramatically. This is the point of Wellesely -- stability.
Image
But, you say, Wellesely didn't do as good! In general it is true that, over the long run, steadier funds (aka less risky funds) don't return as much as riskier funds. You get paid a little better for taking a little more risk. Conversely, with less risky funds you give up some return for safety.

Now look at the same thing for five instead of ten years:
Image
If you had invested in 2008 Wellesely would have done better for you than Wellington!

In the long run, Wellington will probably (no guarantee!) do better than Wellesely but at the cost of more worry. And it is not just worry. What if you had to sell in 2009? You would have had a bigger loss with Wellington than with Wellesely. Volatility is more than just something that affects you psychologically -- it can cost you real money.

P.S. Those are growth charts, not price charts, They take into account reinvested dividends.
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Re: Wellsley Fund

Postby Trev H » Sat Mar 09, 2013 8:32 am

Another thing...

If I were going to hold a combination of Wellesley and Wellington and mix in other funds.

I would consider adding 4 funds in equal weight US Small Value Index, FTSE X-US International Small Market, InterTerm Treasury Bonds, TIPS.

A 50/50 Mix of Wellseley and Wellington gives you a stock/bond ratio of right at 50% Stock/50% Bonds

If you did something like this...

30% Wellesley
30% Wellington
10% US Small Value
10% Intl Small Market
10% IT Treasury
10% TIPS

Your stock/bond ratio would remain basically the same 50/50

But you would add diversification by way of individual components that you don't get in the W & W combo.

Good Luck

Trev H
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Re: Wellsley Fund

Postby Dandy » Sat Mar 09, 2013 11:02 am

"underperforming" for a year or so is usually not enough to warrant changing funds. Wellesley is a very good fund, I own a small amount. My concern would be that it is actively managed and usually holds bonds of intermediate duration. If you are in the fund for the long term that should not be a problem. VG has many excellent balanced funds, some of which have better diversification and lower cost than Wellesley or Wellington. If you are considering a move make it for cost, passive investing or diversification or shorter duration bonds.
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Re: Wellsley Fund

Postby bengal22 » Sat Mar 09, 2013 11:20 am

I would not say Wellsley is underperforming. As you say it is a 65%Bond/35%Equity Mix and if you look at an index fund(2010 VG Retirement is 55% Bond) it is really holding its own. The ER is only .25% which for an active fund is pretty good. As other posters point out you need to determine your acceptable AA and then hold the course. Wellsley is a strong fund in my opinion and it will not hurt your portfolio. During periods of equity drops you will like Wellsley.
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Re: Wellsley Fund

Postby MN Finance » Sat Mar 09, 2013 11:24 am

As already said, this "underperformance" is absolute, not relative. Decisions need to be made in context of similar alternatives, not different alternatives. I'm guessing you're not questioning the outperformance of gold and moving into it. It's been about 25deg all week. I certainly didn't tell my spouse that we need to move to FL because the weather has been totally underperforming the annual average temperature for the last 4 months.
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Re: Wellsley Fund

Postby bertilak » Sat Mar 09, 2013 11:40 am

MN Finance wrote:As already said, this "underperformance" is absolute, not relative. Decisions need to be made in context of similar alternatives, not different alternatives. I'm guessing you're not questioning the outperformance of gold and moving into it. It's been about 25deg all week. I certainly didn't tell my spouse that we need to move to FL because the weather has been totally underperforming the annual average temperature for the last 4 months.

You might want to rethink that! :happy (That's the Florida "Sunshine" face!)

There are many other nice places in the south where cold weather is not a problem! :beer

There is a serious side to this post. Sometimes it is not average performance that is important. Once retired, one is less interested in the averages than in "what's the worst that could happen?" But Wellesely's worst is not too bad anyway.
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Re: Wellsley Fund

Postby midareff » Sat Mar 09, 2013 12:00 pm

I think the first thing you need to do is remember why you bought Wellesley INCOME Fund. It's purpose is to produce a steady source of income (dividends), with moderate price stability, by owning solid dividend producing equities and investment grade bonds in a rought 1/3, 2/3 mix. That's what this fund is about. Mixed with Wellington you get a (roughly) 50/50 mix of higher dividend paying equities and investment grade bonds. That's what they are.

You can make a mix of this yourself, and alter the strategic allocation, if you think you can outguess the market, buy varying the mix of Wellesley/Wellington, or making your own mix of VYM (VG High Dividend Index ET) and either IT Tax-Ex or Investment Grade, depending on your own tax situation and whether or not this is in taxable space.

However, at the end of the day, if you own Wellesley for reasons other than its purpose...... you may wish to rethink your intentions.
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