Vanguard Global Wellington Looks As Strong As We Suspected It Would

Summary

• Vanguard Global Wellington is now four months old, and we can finally examine the composition of the fund.
• The fund is about 1/3 U.S. stocks, 1/3 foreign stocks and 1/3 fixed income. That's heavier on the foreign side than most balanced funds.
• The stock portfolio is overweight in financials and healthcare, two areas of the market that I expect to do well in 2018.
• The bond portfolio is heavily towards corporates, but the risk is managed, while boosting yield.
• The fund is smartly constructed, and there's no reason investors shouldn't consider it as an "all-in-one" solution for their portfolios.

When I first profiled the Vanguard Global Wellington Fund (MUTF:VGWLX) right when it launched back in November, a lot of the analysis was based on what the fund might look like. We knew that it would probably have a similar look and feel to the original Vanguard Wellington Fund (VWELX), but the fact that it was going to invest globally, instead of just in the United States, left some speculation as to where it might invest, how risky the international component might look and how risk within the fixed income allocation might factor in.

The fund is about four months old now, so we can finally answer some of those questions! As a refresher, Global Wellington, at a high level, will look a lot like Wellington. It'll maintain an allocation of around 2/3 stocks and 1/3 bonds, focusing mainly on high quality, mature large-cap stocks, and investment-grade bonds of all maturities. The fund has already accumulated more than $850 million in assets, so investors have taken to the fund, as has largely been expected.

The fund is fairly evenly distributed between domestic equities, foreign equities and fixed income.

On the equity side, Global Wellington invests more heavily overseas than many of its balanced counterparts. I view this as a positive. The U.S. market is more richly valued than many overseas markets, and, in my opinion, presents a more attractive risk/reward opportunity right now.

According to Morningstar, the fund has 95% of its equity assets invested in giant- and large-cap names. Its focus on companies that appear undervalued relative to their peers shows itself in most valuation metrics.

For comparison sake, the S&P 500 (SPY) trades at a forward P/E ratio of around 18, not a huge premium to the equity portfolio of VGWLX. The value nature of the portfolio is much more explicit when looking at other metrics. The S&P 500 trades at a P/CF ratio of around 13, and a P/B ratio of 3.0. Again, I view this as a positive for fund, as I believe value stocks will begin outperforming growth, as interest rates continue to rise and P/E multiples begin to contract.

The fund's 25% allocation to financials is a direct play on the rising interest rate environment. Financials should continue to do well in this scenario since that means higher rates that banks can charge on loans which, in turn, translate into greater net interest income. The above average weight to healthcare is also smart. There have been ongoing concerns that the government is going to go after high drug prices, but that feels pretty low on the Washington agenda right now, as the focus remains on taxes, immigration and infrastructure.

Globally, we see the largest percentage of equity assets going to Europe, with a good-sized chunk also heading to Japan.

The 30-10 breakdown between Europe and Asia was expected, based on comments directly from Vanguard when the fund was launching. The largest individual country holdings in Europe belong to Switzerland (7%), France (5%) and Germany (4%).

The fund's fixed income allocation is entirely dedicated to investment-grade bonds, but not necessarily as much to government bonds as I would have expected.

It's mostly invested in corporate bonds on the lower end of the investment-grade spectrum. Government bonds may be more susceptible to rising interest rates than corporate bonds, so this may be a good positioning in the current environment. One notable difference between this fund and Wellington is its overall bond duration. Global Wellington is at 5.8 years, compared to 6.4 years for Wellington. That's a good idea in the current interest rate environment, but it also comes at the expense of yield, where the fixed income component of Global Wellington is currently 70 basis points lower.

The bond portion of the fund looks similarly well distributed.

The fixed income portfolio is also much more globally diversified than the typical balanced fund. Coupon rates on bonds held by the fund are mostly in the 2-3% range, but a full 19% of bond assets have a coupon of 4% or greater.

Conclusion

I like the way that Wellington Management has constructed this fund. Its above average allocation to foreign equities seems like a smart play to protect itself from high valuations in the U.S. and interest rate risks in the non-financials space. The mixed duration composition of the fixed income portfolio presents some risks as the Fed continues to lift rates higher. I'd prefer a slightly lower duration here, but I understand that Wellington is likely keeping a longer-term view.

It's a very short track record that we have to work with here, but this looks like another winner for Vanguard. The fund's overall composition is smart, and the risks within certain parts of the portfolio seem well-contained. There's no reason investors shouldn't consider this as a great "all-in-one" fund for their portfolios!

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.