That piece is arguing that at best, VWINX will fall less than other traditional funds, e.g. since it leans toward value
5;. That's in contrast to funds that are designed to benefit from inflation. Which is why I felt that it doesn't make much sense to directly compare performance of these two types of funds.
5;This is not unusual for traditional 40/60 funds. Only 4 out of 120 (30%-
50% allocation) funds have portfolios that are in growth style boxes (per M* screener).
The writer speaks in sweeping generalities without substantiation:
- the fact that the Fed Funds rate will stay at or near zero for at least the next few years [as of Sept 2020].
Facts don't change, but predictions do as events change or more data is known. In June, "The central bank forecast[] it would raise interest rates twice by the end of 2023 after previously estimating there would be no interest rate hike until 2024."
Most recently (Sept), "Just over 70 per cent of [leading academic economists surveyed by FT] believe the Fed will raise rates by at least a quarter of a percentage point in 2022, with almost 20 per cent expecting the move to come in the first six months of the year. That is far earlier than the 2023 lift-off from today’s near-zero levels that Fed officials pencilled in back in June."
- Higher inflation likely leads to higher interest rates and a steeper yield curve?
Wellesley traditionally holds a longer duration portfolio than is typical for its peers. That would hurt Wellesley if you believe this generalization linking interest rates and yield curves and that it will hold the next time.
However, when we look at the last sharp spike in interest rates (1978-1981) we see a very different picture. Rate going up across all maturities (which would hurt all high grade bonds), but with the yield curve inverting - the opposite of steepening. (Inverted yield curves often presage recessions, which in turn can be triggered by high inflation and lower spending.)
(Source page)
Speaking of the late 70s and inverted yield curves, banks (notably S&Ls) took a beating, as they lent out long term money at lower rates while borrowing short term money (via deposit accounts) at higher rates. SA notes that VWINX concentrates on financials, but doesn't break it down further. (According to its latest
semiannual report, about half of the fund's financial sector holdings are in banks: JPM, BAC, MS, TFC.) Personally, I have faith in Wellington Management to navigate
this risk.
M* has an actual analysis of real performance data for VWINX to see how the fund responds to rising interest rates.
https://www.morningstar.com/articles/1041732/stress-testing-some-vanguard-and-t-rowe-allocation-fundsWhat M* found was that Aug-Dec 2016, "as the price of long-dated bonds fell, Vanguard Wellesley Income lagged its average category peer by 1.2 percentage points." VWINX lost money over that period while on average its peers eeked out gains.
OTOH, "over the more recent January-October 2018 interest-rate climb ... [VWINX] modestly outpaced the average of that group by 0.
5 percentage points. Even with its longer duration, the strategy’s lower exposure to weaker-performing non-U.S. equities gave it a bump.
Hmm, a lesser exposure to foreign equities. SA didn't pick up on this. Could help again if rates climb globally, but hurt if rates rise disproportionately in the US. Regardless, we're again talking about relative performance against peers, not measuring against inflation oriented funds.
I certainly wouldn't sell VWINX. Though that's different from saying that this fund is designed to weather extended bouts of inflation well.
