VDIGX: A Great 'Hedge' Fund

Summary

• The VDIGX has outperformed the market in both bull and bear markets.
• It offers a triple threat of value, growth and income.
• While the fund is closed, I recommend closely following their holdings.

Thesis Summary

With the imminent threat that the market is turning bearish, investors are now looking to shift their portfolio balances and hedge their investments with some defensive stocks and even precious metals. The Vanguard Dividend Growth Fund Investor Shares Inv (MUTF:VDIGX) offers a nicely balanced portfolio that has a track record of outperforming in bear markets. The mix of blue-chip value companies together with the dividend makes it a winner in my book.

Overview

The first thing we must know about the VDIGX is that this is a closed fund. Therefore, no new investors can enter the fund at the moment. Furthermore, it is an actively managed fund, which means it does change its composition over time. However, this does not mean we can’t see what investments this fund is making and replicate it ourselves. It is a shame, though, since Vanguard funds are usually very competitive in terms of fees. Nonetheless, let’s take a look at the holdings and see how they have performed.

Holdings

Source: Ycharts

The list above shows the top 25 holdings of the fund. As we can see, the fund is filled with classic household nomes: Coca-Cola Co (KO). McDonald’s Corp (MCD), Johnson & Johnson (JNJ), Nike Inc (NKE), etc.

From a value investing perspective, the fund is filled with classic value plays. A company such as coca-cola or McDonald0s will continue to make money probably long after we are dead. However, the fund also has some interesting plays, which have helped it outperform the market in the last 10 years.

Firstly, let’s talk about industry distribution. The fund’s top investment is in Industrials, closely followed by healthcare, both around 20% of the portfolio. Needless to say, healthcare will be a great sector to be in for the foreseeable future. Little is more valuable to humans than life itself, and technology is giving us ways of buying more life. With the average population aging in most developed countries, healthcare services are only going to become more demanded in the next 20 years.

The next two tiers of the fund in terms of the industry are consumer defensive and financials. Companies. Companies such as Procter & Gamble are a safe play in a recession. Normally, I would be wary of financial investments given the current interest rate environment and track record of banks, However, some of the biggest holdings in this sector are American Express company (EXP) and Visa Inc (V). While their fate is of course somewhat linked to that of the big banks, these companies deal with payment processing. In a world that is slowly grinding its way towards a cashless existence, these companies are a good place to put your money. With the inception of fintech, we could also view this specific sector of finance as high growth, in my opinion.

The rest of the fund is made up of the usual suspects; consumer cyclical, technology, real estate, energy, and basic materials. Overall, a very well balanced portfolio with some emphasis on value plays and high growth sectors.

Recent Performance

The fund has proven itself a winner in both good and bad times:

Source: Ycharts

As we can see in the comparison above, the fund has outperformed the S&P 500 in the last 10 years. The higher return, however, doesn’t come at the expense of higher volatility or downside risk. Since reaching a peak, the VGIX lost exactly 11.97% before the recovery of the last few days. Meanwhile, the S&P suffered a loss of 12.76% from its peak to its most recent low.

More staggering, however, has been the bounce back off the low, with the VDIGX climbing 5.16% fin the last few days. The market, on the other hand, has barely moved, appreciating only a mere 0.49% in the same time frame.

Takeaway

As far as managed funds go, this is the best one I have seen. It is a triple threat of value, growth, and income. It has a proven track record of beating the market, and that can’t be said about many funds. Now more than ever, I believe this fund offers a great way to assume a defensive position while still gaining exposure to the market’s upsides. Any savvy investor would do well to follow the fund’s holdings.

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.