A Tale of Two Wellington Funds, With a Cautionary Note Too

VDIGX Re-opens

The news that the Vanguard Dividend Growth Fund(VDIGX) re-opened to new investors escaped me until subscribers on my Youtube channel mentioned it.

Generally, I’m an index type-of-guy but I do appreciate a well-run, low-cost, actively-managed fund too; American Funds and the active funds at Vanguard come to mind.  I also appreciate a fund that limits the amount of assets it takes in, as per the Vanguard press-release:

“Vanguard closed the fund to most new accounts in July 2016, seeking to protect the interests of existing shareholders by reducing cash flow after a period of rapid growth. Cash flow has subsequently subsided and market conditions have changed since the fund’s closing.”

That VDIGX closed to new investors, and is re-opening, tells me it will close again. And so, I wanted to do some research on this fund to see if this was a fund I’d want to own.

Again from the Vanguard press-release:

“Introduced in May 1992, the actively managed Vanguard Dividend Growth Fund is designed to provide investors with some income while offering exposure to dividend-focused companies across all industries. The fund focuses on high-quality companies that have both the ability and the commitment to potentially grow their dividends over time. Reopening the Fund will have no impact on its investment objectives, strategies, and policies, and Wellington Management Company LLP remains the fund’s investment advisor.”

 

Index Investing Vs. Active-Management

Turns out, this is an amazing fund. Exactly what one would expect from Vanguard.   

$100,000 invested on Jan. 1, 1993 would have grown to $729,794 by Dec. 31, 2018.  The fund only had 5 down years in those 25 as well. So, not only did you make a lot of money, you didn’t have many down years either.  

 

Lower Volatility

In fact, other than 2001 when the fund was down over 19%, it was a whole lot less volatile than the S&P 500 index. For instance, in 2000 when the S&P 500 was down around 9%, VDIGX was UP nearly 19%!

In 2008 when the S&P 500 was down 37%, VDIGX was “only” down 25.57%.   But, don’t forget, the Wellington fund was “only” down 22%. And in those crazy years of 2000-2002, where both the VDIGX and S&P 500 got knocked around, Wellington only had 1 down year, -6.9% in 2002.

VDIGX, VWELX, VFINX Over The Years

So, I thought it would be fun to do a comparison of all three funds over the last 25 years.

Let’s start with an investment of $100,000 into each fund on Jan. 1, 1993.  How did we do?

VDIGX$100,000VWELX$100,000VFINX$100,000
199315.06$115,06013.52$113,52010.17%$110,170
1994-8.55$105,222-0.49$112,9641.19%$111,481
199534.03$141,03032.92$150,15138.02%$153,866
19965.28$148,47616.19$174,46123.06%$189,348
199725.09$185,72923.23$214,98833.67%$253,101
199821.83$226,27312.06$240,91628.73%$325,817
1999-2.96$219,5754.41$251,54021.11%$394,597
200018.77$260,79010.4$277,700-9.11%$358,649
2001-19.45$210,0664.19$289,336-11.98%$315,683
2002-23.16$161,415-6.9$269,372-22.27%$245,380
200329.02$208,25720.75$325,26628.72%$315,854
200411.02$231,20711.17$361,59910.82%$350,029
20054.23$240,9876.82$386,2604.79%$366,795
200619.58$288,17314.97$444,08315.74%$424,529
20077$308,3458.34$481,1195.46%$447,708
2008-25.57$229,501-22.3$373,830-37.22%$281,071
200921.74$279,39522.2$456,82027.11%$357,270
201011.42$311,30110.94$506,79614.87%$410,396
20119.43$340,6573.85$526,3082.07%$418,891
201210.39$376,05112.57$592,46515.88%$485,411
201331.53$494,62019.66$708,94332.43%$642,829
201411.85$553,2339.82$778,56113.81%$731,604
20152.62$567,7280.06$779,0281.31%$741,188
20167.53$610,47711.01$864,79911.93%$829,612
201719.33$728,48314.72$992,09821.94%$1,011,629
20180.18$729,794-3.42$958,168-4.42%$966,915

As you can see in the table above, VDIGX under-performed both Wellington AND the S&P 500 by a LOT over that time period. You’d be almost $250,000 richer in the S&P 500 and Wellington Fund!  That is a lot of money, indeed.

But before you dump ALL your money into the S&P 500 based on the above, you may want to consider this:

VDIGXVWELXVFINX
$100,000$100,000$100,000
2000$118,770$110,400$90,890
2001$95,669$115,026$80,001
2002$73,512$107,089$62,185
2003$94,845$129,310$80,045
2004$105,297$143,754$88,705
2005$109,752$153,558$92,954
2006$131,241$176,545$107,585
2007$140,428$191,269$113,460
2008$104,520$148,616$71,230
2009$127,243$181,609$90,540
2010$141,774$201,477$104,004
2011$155,144$209,234$106,157
2012$171,263$235,535$123,014
2013$225,262$281,841$162,908
2014$251,956$309,518$185,405
2015$258,557$309,703$187,834
2016$278,026$343,802$210,243
2017$331,769$394,409$256,370
2018$332,366$380,921$245,039

From 2000 through 2018 an investment of $100,000 into the three funds would have more than tripled with VDIGX, almost QUADRUPLED in Wellington and, yet, only a bit more than doubled in the S&P 500.

Interesting, no?

So far, from 1993-2018 and 2000-2018, the Wellington Fund appears the cream of the crop, by far.

But before you throw all your hard-earned money into Wellington based on those two scenarios, you may want to consider this:

VDIGXVWELXVFINX
$100,000100000$100,000
2008$74,430$77,700$62,780
2009$90,611$94,949$79,800
2010$100,959$105,337$91,666
2011$110,479$109,392$93,563
2012$121,958$123,143$108,421
2013$160,411$147,353$143,582
2014$179,420$161,823$163,411
2015$184,121$161,920$165,552
2016$197,985$179,747$185,302
2017$236,256$206,206$225,957
2018$236,681$199,154$215,970

From the beginning of 2008, with the HUGE decline that happened, to the end of 2018, VDIGX did significantly better than the other two funds.   

In fact, take out that crazy 2008 and we find:

VDIGXVWELXVFINX
$100,000$100,000$100,000
2009$121,740$122,200$127,110
2010$135,643$135,569$146,011
2011$148,434$140,788$149,034
2012$163,856$158,485$172,700
2013$215,520$189,643$228,707
2014$241,059$208,266$260,291
2015$247,375$208,391$263,701
2016$266,002$231,335$295,161
2017$317,420$265,388$359,919
2018$317,992$256,311$344,011

The S&P 500 reigns supreme again!

 

How To Predict The Future

What to make of all this?  Well, first and foremost, you simply can’t predict which investment will perform best in the future.  You MUST admit you have no clue. Should you even look at past performance as your guide? Actually, probably not. Why? Because kind of like how climate change alarmists cherry pick the data to “prove” warming, you have to make a determination of what year to start your past performance research.

Start in 1993 and VDIGX looks like a dog compared to VWELX and VFINX.  Yet, start in 2008 and VDIGX smokes ‘em all. One year later though, and VFINX is back on top.

 

Be Careful Not To Cherry-Pick

So, why focus on one year as opposed to another?  It’s ALL in the past after all. To choose past performance based on X year over Y year is inherently manipulating the data.

However, one of the best reasons to own Vanguard funds is because we know the simplest, most proven way to predict future performance is the fees you pay to invest.  The lower the fees, the better your performance will be. All of these funds have incredibly low expense ratios AND very high tax efficiencies too. Tough to go wrong in that regard.

Another thing to consider is that VDIGX only has 41 stocks as of today, Sept. 2019.  That is a VERY concentrated portfolio.

 

How To Outperform

If you want to outperform, concentrated portfolios are what you must invest in.  When that area of your investing focus takes off, you’ll do way better than a broad and diversified portfolio. Of course, when that area of your investments gets hammered, you’ll get crushed much more so.  The more concentrated, the more up, and down, side.  

A portfolio built solely on Amazon stock WAY outperformed.  A portfolio built solely on GE got destroyed. Concentration = risk. No two ways around it. 

Remember, though, there’s nothing wrong with saying, “You know something? I like all THREE funds, let me throw ⅓ into each.”  That’s probably the best path to take. 

Now, be advised, I do own VDIGX.  Just bought into it the other day. That and VTV are my only two holdings.  That’s it. I do not own Wellington or the S&P 500 index. Only time will tell if I’m smart, or a loser.  

Stay tuned to find out!

I Can’t Get Over How Bad The 70’s Were For Investors…

The Wellington Fund will be the focus of my next book; working title is “Retiring On The Wellington Fund”. And in my research, it is incredible seeing the REAL numbers.

We’re told over and over how bad the 30’s were; The Great Depression era. Yet, those 10 years don’t even come close to the devastation of the 70’s.

And while I don’t try to get overly political here, the blame has to lay with Richard Nixon, who actually said “we’re all Keynesians now.” It’s odd because I bet if you took a sample of non-partisan people they’d say Carter was a worse President than Nixon.

Take a big picture view, though, in a non-partisan way, you could easily make the case that Carter, of all people, probably saved us from socialism. Carter, and even Ted Kennedy if you can believe that, deregulated industries left and right.

Reagan, of course, took the baton and thus defeated the Communist threat, even though many leading thinkers of the day predicted a different result.

“The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.” That’s Paul Samuelson, a Nobel Prize winner in economics, writing in his economics textbook in the year of 1989…..hmmm, anything big happen in 1989?

By the way, it wasn’t just socialist-leaning economists who got the collapse of the Communist system wrong, it was our very own CIA. Hard to believe right? Our CIA giving us bad data? No, Never.

(On a side note, as a budding economist myself, it was people like Samuelson who have nearly ruined the field. By taking it from an amazing study of how people interact in their economic decisions to an almost strictly mathematical theoretical approach. It’s nothing more than science-envy, truth be told. Economists want to be taken seriously as a hard science, not a social science. And thus they come up with mathematical equations that no one understands to show their hard science street cred. Yet, their equations are truly voodoo economics as witnessed by Paul Samuelson predictions of the Soviet Union. Reminds me of some other fanciful predictions made over time that continue to be proven wrong. I’ll leave it to your imagination to ponder what I’m referring to….AHHHHH, not I won’t! The climate doomsayers!)

So, going back to the Wellington Fund, let’s take a look how it did from 1930-1939. $100,000 invested at the beginning of 1930 was worth $135,000 by the end of the decade, net of inflation.

In fact, at no point had you invested at the beginning of a year in the 1930s would you have lost money 10 years later.

Yet, let’s take a look at how your investment in Wellington in the 1960s would have fared by the 1970s.

That is some ugly stuff right there. Oddly these were the ONLY 10 year periods where Wellington actually lost value net of inflation in its 88 year HISTORY.

What does that tell you? Well, it’s simple. Inflation is the threat to your retirement. There is no ands, ifs or buts for this. Inflation is devastating.

You then should take heed to any policies which are inflationary. While government spending, i.e., the Trump/Pelosi meeting of the minds, may seem inflationary, come talk to me when Japan is running rampant inflation.

But there is ONE thing which is always and everywhere inflationary. Wanna guess what that is?

Socialism. Under socialism the pricing system is removed. With no price point there is no way to legally establish true value in products and goods. Funny thing though is individual humans still know what products are more valuable to them than other products and thus black markets are created. (See Hernando De Soto’s book “The Other Path” for a wonderful accounting of how this works.) And when there is no price to discriminate between two products, one of value and one of none, there will ALWAYS be a run on the product that truly has value.

That run leads to scarcity which ultimately leads to runaway inflation. Eventually, the only way to acquire valuable products is in the underground economy, where the pricing mechanism ALWAYS exists. This is literally not rocket science. Just fundamental human nature. And sadly we have evidence of this exact thing happening over and again. Venezuela is just the current example.

So, while I do wonder about where our government’s out-of-control spending will lead, I don’t worry about that to the extent I worry that socialism has reemerged.

It’s an odd phenomenon actually. Never works but for some reason its aura is irresistible to some, many even. “Yeah, those other guys didn’t make it work. But we can! We’re smart after all…”

Interestingly is that in an inflationary environment those with debt will be in hog heaven. At least that’s the idea. Your fixed rate debt is being reduced each and every year by a decreasing value in the dollar. Thus inflation rewards debt! And governments then see inflation as a way to get out of debt. They literally inflate their way out of debt. UGH.

Thankfully lenders aren’t stupid. They may be taken to the cleaners initially on the debt they already loaned out, but it won’t happen again. They just ramp up the cost of your future debt to keep up with the decline in the value of the dollar. Pretty simple stuff, actually. Yet, the socialistic model still retains tons of adherents. Socialism is judged by its promises, capitalism by its results, as the saying goes.

Always remember, inflation is your enemy. No two ways around it. And the inflationary policies of EITHER political party, be it Richard Nixon or Bernie Sanders needs to be called out for the devastation it has, and will, cause.

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