Introduction
In my previous article, Vanguard Wellesley Fund (MUTF:VWINX) - An Exceptional Conservative Mutual Fund Hidden In Plain Sight - a handful of reader’s comments expressed concern regarding Wellesley’s performance going forward, particularly since the fund holds 60% +/- in bonds, making it vulnerable to an increase in interest rates. Here are a couple of these comments:
Those who bought (VWINX) long ago (i.e., 10+ years ago) benefited from buying when interest rates were much higher, thus leaving room for lots of bond price appreciation.
@Cat2005
[VWINX] has benefited from the great secular bull market in bonds, which is essentially over with, interest rates now so low. Huge question for investors is long-term future bond returns in what will likely by a rising interest environment.
@Geomann1
The above observations deserve being addressed. Although the focus of this article is on the impact of interest rates on the Wellesley fund, the concepts discussed below are applicable to other bond funds and interest-rate sensitive trading vehicles.
Abstract
Many investors believe we’ve been in a bond bull market for decades and the party is coming to an inevitable end soon. One way to find out is to examine interest rates behavior and trends over the last 6 decades and compare it to Vanguard’s Wellseley Income Fund’s performance. I will take a closer look at interest rate during three distinct periods: sharply rising and declining rates as well as low and stable interest rates. I will show the various categories of bonds and examine their correlation. Finally, I’ll share with you some strategies for managing interest rate risk. You will see how well the Wellesley fund performed, since its inception in 1971, during various and extreme interest rates cycles.
Interest Rates – Where We Have Been
Among the comments I received for my
