While six months isn’t a long enough time period to measure a fund’s success, Wellesley’s record over the decades is impressive.
Wellington Management Company LLP, which has managed Wellesley since the fund’s inception, maintains an asset allocation of about two-thirds bonds and one-third stocks. This asset mix is distinct among balanced funds, which usually tilt more toward stocks than bonds, and has helped control the fund’s reaction to volatility through bull and bear markets.
In the most recent Vanguard fund reports, which cover the six months ended March 31, Wellesley’s advisors offered their views on bond and stock markets and the unusual investment climate.
“We are cautiously constructive about the U.S. credit markets,” portfolio managers John C. Keogh and W. Michael Reckmeyer wrote. “The economic and credit cycles look to be tiring, but the powerful flood of global capital into our bond market—and credit in particular—shows no sign of abating. Low and negative yields in other major economic zones continue to drive capital flows toward the higher yields and safety of the U.S. markets.
“Our outlook is not without uncertainty, however. We cannot recall a period when external global forces were as important to the U.S. economy and policies as they are today. Therefore, we are mindful of global events even though our focus is on the U.S. bond market.”
The pair’s view on equities was also cautious as they noted the U.S. economy was in its seventh year of expansion, and we have yet to see the impact of the Federal Reserve’s quantitative easing program considering the “global uncertainties and the actions of other central banks.”
“Against this backdrop, the consumer remains resilient,” Keogh and Reckmeyer wrote. “However, the strong dollar will likely weigh on U.S. exports, and energy and industrial inventories remain elevated. We are wary of a potential downturn after our long run of moderate growth. “Although our base case remains moderate U.S. GDP growth, we are positioning the portfolio somewhat defensively. To ensure that we will be comfortable with our holdings if the market experiences a sustained downturn, we are focusing on companies that can sustain or grow their dividend payments in a lower-growth environment.”
Although PRIMECAP Management Company is known for its large exposure to the technology and health care sectors, the firm has also favored airline stocks in recent years.
Up and away?
As of March 31, 2016, airlines represented significant portions of PRIMECAP Management’s three Vanguard funds: about 10% in Capital Opportunity, 8% in PRIMECAP Core, and 6% in PRIMECAP. In its letter to shareholders, PRIMECAP Management outlined its stance on airline stocks and the risks involved.
“Industry fundamentals remain strong, with robust traffic leading to high load factors and lower fuel costs boosting earnings,” the managers wrote. “Nevertheless, investors remain leery of the industry. We recognize that terrorism presents a significant risk and are especially concerned given the recent terrorist attacks in Paris and Brussels.
“But we believe that structural changes over the last several years—the most important of which is industry consolidation—have enabled airlines to prosper under normal conditions. Furthermore, the industry benefits from secular trends, as demonstrated by the fact that global passenger traffic growth of 6% far exceeds real global GDP growth. In spite of these positives, several of our airline holdings trade at among the lowest price-to-earnings multiples in the S&P 500 Index.”
Even the most carefully planned investment portfolio will stray from its asset allocation boundaries as stocks and bonds rise and fall over time. In his closing remarks in letters to shareholders, Vanguard Chairman and CEO Bill McNabb counseled investors to consider rebalancing as a way to bring their intended target back into focus.
Reasons to rebalance
“Rebalancing to bring your portfolio back to its original targets would require you to shift assets away from areas that have been performing well toward those that have been falling behind,” McNabb wrote. “It’s a way to minimize risk rather than maximize returns and to stick with your investment plan through different types of markets.
“However you go about it, keeping your asset allocation from drifting too far off target can help you stay on track with the investment plan you’ve crafted to meet your financial goals.
Vanguard Capital Value Fund
Other recently published reports:
Vanguard Equity Income Fund
Vanguard Global Equity Fund
Vanguard Growth and Income Fund
Vanguard Morgan™ Growth Fund
Vanguard Strategic Equity Fund
Vanguard Strategic Small-Cap Equity Fund
Vanguard Structured Equity Funds
Vanguard U.S.Value Fund
*The performance data shown represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors’ shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited.
Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.