Two fine mutual funds to consider buying

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

If you're looking for a good, solid mutual fund (or two), I've got just the ticket. No-load. (No sales charges — you buy shares directly.) Low cost. Conservative. Splendid track records, and over long periods of time.

They're both "balanced" funds (Morningstar calls them "hybrids"), meaning that they have a big chunk of both stocks and bonds. (Classically, 60% stocks, 40% bonds, but the percentages can vary.) Usually the stocks in balanced funds are conservative.

Not to keep you in suspense, the two funds are Vanguard Wellesley Income and Vanguard Wellington.

If I were to create a Mutual Fund Hall of Fame, I'd include those two funds without hesitation. (Though I must confess that, years ago, when I first created a Mutual Fund Hall of Fame, the first entrant was Twentieth Century Select. It proceeded to rapidly fall all the way to China. Fame and fortune can be fleeting.)

Wellington is the more aggressive of the two, having typically 60% in stocks; Wellesley Income, typically only 40%. (I own shares of Wellesley Income.) Wellesley, naturally, has a higher yield.

The funds are similar. They're both managed by Wellington in Boston, which handles a good many Vanguard funds. Both are large/value funds. Both get Morningstar's highest rating; both are "analyst picks." The same guy manages the bond portfolio of both funds.

Of the ten biggest holdings in the two funds, five are overlapping: Merck, Pfizer, AT&T, Johnson & Johnson, and Chevron.

Wellesley has done somewhat better over time, thanks to its heavier weighting in bonds: 7.47% a year over ten years, annualized, versus 7.03%.

At the same time, it's been more stable. It lost only 9.84% in 2008, gained 16.02% in 2009; Wellington lost 22.3% in 2008, gained 22.2% in 2009. Wellesley's standard deviation (a measure of volatility) is 9.18, Wellington's is 13.66.

Clearly, they tend to behave somewhat differently. Wellesley's R-squared is 85, Wellington's is 96 — numbers indicating how closely they follow their most similar index, a version of the Dow.

Other differences: Wellington has a more diverse stock portfolio — it can more readily buy growth stocks instead of high dividend-payers. It also has $47.7 billion in assets, whereas Wellesley has only $14.7 billion. Wellington has a $10,000 minimum, Wellesley $3,000. They even have different phone numbers: Wellesley's is 800-662-7447, Wellington's is 800-662-6273.

Okay, time to answer the pressing question: Which might you buy?

The editor of the newsletter, The Independent Adviser for Vanguard Investors, Daniel P. Wiener (pictured), suggests that investors buy both — a shrewd suggestion.

While he is not normally an advocate of anyone's buying more than one balanced fund, he writes: "A great way to build a portfolio that will allocate approximately 50% of assets to stocks and 50% of assets to bonds, at extremely low cost (about 0.28% [a year]), is to own equal measures of Wellington and Wellesley Income."

He's compared the combined performance of the two funds with other, passive Vanguard funds, and Wellesley/Wellington has left them far behind. You would, of course, have to buy at least $10,000 worth of both funds.

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