6 Best Vanguard Mutual Funds
Editor's note: Many investors might look to a single fund family to populate their portfolio, either out of compulsion -- if, for example, their 401(k) plan offers only funds from one brand -- or convenience. This review of Vanguard funds is part of a series that looks into picks from the most well-known fund shops.
Vanguard is far and away the country's biggest fund family, with nearly $2 trillion in mutual fund assets (that beats Fidelity by $600 billion). And the cash keeps coming: More money has flowed into Vanguard than any other fund firm in each of the past three years. It offers 75 actively managed mutual funds and 50 exchange-traded funds, all of which are among those with the lowest costs in the business.
But which of its mutual funds are true standouts?
We looked at all the firm's offerings, from bond and stock funds to foreign, balanced and target-date funds. Of course, the Malvern, Pa., company's index funds are legendary; Vanguard Total Stock Market (symbol VTSMX) is the country's biggest stock mutual fund, with $202 billion in assets. But we ventured beyond Vanguard's benchmark-tied funds to find the best of its actively managed portfolios. (A few that passed muster aren't mentioned here because they are closed to new investors. All returns through November 15.)
You'll notice that a number of our picks are run by Wellington Management, a Boston-based investment firm. Vanguard and Wellington have a relationship that dates back to 1929, when Vanguard Wellington, one of the country's oldest mutual funds, was launched. Today, Wellington managers run 11 of the fund firm's 160 portfolios.
1. Vanguard Equity-Income (VEIPX)
We like Equity-Income because it has consistently outpaced the typical fund in its category, beating the average large-company value fund in seven of the past ten calendar years. Over the past five years, the fund returned 2.5% annualized, beating 94% of its peers. The fund, which yields 2.92%, benefits from low expenses of 0.31% per year.
Two unrelated firms manage this large-company value fund. W. Michael Reckmeyer, of Wellington Management, runs two-thirds of the portfolio, picking stocks by digging into company balance sheets and income statements, among other things. A trio from Vanguard's stock group -- James Stetler, James Troyer and Michael Roach -- manages the rest, using computer models to choose stocks. Both teams hunt for undervalued securities with dividend yields higher than that of Standard & Poor's 500-stock index.
2. Vanguard Dividend Growth (VDIGX)
Manager Donald Kilbride has turned this fund, a member of the Kiplinger 25, into the gold standard of dividend funds that, not surprisingly, invest in stocks that pay steadily rising dividends. The average dividend-growth rate for the fund's holdings over the past five years is an impressive 13% a year. That high hurdle steers Kilbride toward companies with strong balance sheets, predictable and sustainable cash flow and above-average return on equity (a measure of profitability). Think Johnson & Johnson (JNJ), Microsoft (MSFT) and PepsiCo (PEP).
Kilbride, who is also with Wellington Management, keeps a trim portfolio of about 50 names and buys and sells stocks infrequently; on average, he holds on to a stock for about seven years. A fund with a focus on dividend growth won't have an eye-popping yield -- Dividend Growth's is just 2.29% -- but the flip side in this case is a long-term total return that beats the broader stock market. Over the past five years (Kilbride has managed the fund since early 2006), Dividend Growth returned 3.5% annualized, compared with 0.8% for the S&P 500. Annual expenses run a low 0.31%.
3. Vanguard GNMA (VFIIX)
There's nothing fancy about this fund except the results. Manager Michael Garrett invests only in securities guaranteed by the Government National Mortgage Association. (Ginnie Maes, as they are known, are pools of home mortgages backed by Uncle Sam.) Garrett zeroes in on Ginnie Maes with a low risk of prepayment (that is, the return of your money sooner than expected because of home-mortgage refinancing) and buys the ones that are cheap. It's a simple approach, yet the fund consistently outperforms the majority of its peers. In fact, in every calendar year since 2002, Vanguard GNMA has outpaced 60% or more of its competitors in its category. No other fund in this group holds that distinction.
Paul Kaplan and Thomas Pappas led the fund for many years. But Kaplan stepped down in 2006, and Pappas in mid 2010. Garrett became a fund co-manager in 2006. He exited in 2009 for 18 months, returned in mid 2010 and is now the fund's sole manager. Over the past five years, the fund has earned a 6.0% annualized return, which beats 81% of its competitors. With $40 billion in assets, it is the largest intermediate government fund in the country. The fund yields 2.14% and charges an expense ratio of just 0.21%.
4. Vanguard Intermediate-Term Investment Grade (VFICX)
Here's a straight-forward approach: 75% of the portfolio is invested in investment-grade corporate debt (bonds that are rated at least triple-B), and 25% is devoted to government bonds, mortgage-backed and asset-backed securities, municipals and cash. Manager Greg Nassour, a veteran on Vanguard's fixed-income team, leans toward the lower end of investment-grade:
At last word, his fund had two-thirds of its assets invested in single-A and triple-B bonds, double the amount of the typical intermediate-term bond fund. That hurt performance in 2008 -- the fund lost 6.2% and trailed its typical peer by 1.5 percentage points. But in every other calendar year over the past decade, Intermediate-Term beat the average intermediate-term bond fund -- in seven of the past ten years it ranked among the top 25% of its category. The fund returned an annualized 7.6% over the past five years, compared with 6.2% for the average medium-maturity fund. It yields 2.02%, and of course, it boasts a low annual expense ratio of just 0.20%, compared with 1.22% for its peer group average.
Nassour stepped in as VFICX manager in 2010, but don't think of him as a newbie. He's been an analyst with the fund since 1998. Former manager Robert Auwaerter, who launched the fund in 1993, now heads up Vanguard's fixed-income department.
5. Vanguard Wellington (VWELX)
Critics often say funds can't outperform consistently over decades. We can't attest to every ten-year period in Wellington's 83-year history -- it's the oldest balanced fund in the country -- but the last one has been pretty good: Since 2002, the fund has lagged the funds in Morningstar's moderate-allocation category in just two years -- 2009 and 2010. What's more, the fund's returns in those calendar years, 22.2% and 10.9%, respectively, are still impressive. Wellington's ten-year annualized return of 7.9% beats the S&P 500 by an average of 1.7 percentage points per year.
Given the fund's name, you won't be surprised that it's run by two Wellington Management partners based in Boston. John Keogh mans the bond side, which accounts for about 35% of the portfolio's $64 billion in assets, and Edward Bousa controls the stock side, which accounts for the rest. Wellington yields 2.4% and charges 0.27% a year in expenses.
6. Vanguard Wellesley Income (VWINX)
Wellesley is the mirror image of Vanguard Wellington. While Wellington has about 65% of its assets in stocks and the rest mostly in investment-grade corporate bonds, Wellesley reverses the allocations. That makes Wellesley an ideal fund for those who want to minimize risk.
Wellesley's record is impressive. Over the past decade, it returned 7.3% annualized. That outpaced the typical fund in Morningstar's conservative-allocation category by an average of 1.8 percentage points per year. It also beat the S&P 500 by an average of 1.1 points per year. In 2008, the year in which the S&P plunged 37%, Wellesley lost 9.8%, and the average conservative-allocation fund slumped 19%.
As is the case with Vanguard Wellington, control of the fund's stocks and bonds is split between two managers, both from Wellington Management. W. Michael Reckmeyer handles the stock side of the portfolio, and John Keough, controls the bond side. The fund yields 2.42% and charges just 0.25% a year in expenses.
Kiplinger's Investing for Income will help you maximize your cash yield under any economic conditions. Subscribe now!