If Vanguard had a family tree, its roots would be Vanguard Wellington Fund. Now the nation’s largest balanced mutual fund¹, Wellington Fund began operations on July 1, 1929, 85 years ago this week.

Today, Vanguard’s family tree includes a number of balanced funds, from actively managed funds such as Vanguard Wellesley Fund to index-oriented funds such as the Vanguard Target Retirement Funds.

Although Wellington’s traits are most visible in these balanced fund branches, they can also be found in almost every expression of Vanguard’s investment DNA. Consider Vanguard’s Principles for Investment Success, a codification of our counsel to clients.

Goals

The first principle for investment success is to create clear, appropriate investment goals. Today, we use this principle strictly in the context of investment goals. But if we allow the word goals to refer to both business and investment goals, the Wellington connection is crystal clear.

When Walter Morgan, a Philadelphia accountant, founded Wellington, his goals were to provide more effective portfolio management for clients who held motley collections of individual stocks and bonds. “There must be a better way to diversify investment than the purchase of only a few securities,” Mr. Morgan wrote. “There must be a better way to handle the problems of safekeeping a large number of securities, clipping hundreds of bond interest coupons, recording multiple purchases and sales and dividends.”²

There was: A professionally administered and better diversified portfolio of stocks and bonds in a single mutual fund, the Wellington Fund.

Balance

Vanguard’s second principle for success is to develop a suitable asset allocation using broadly diversified funds. Here, the Wellington heritage is unmistakable. At the tail end of the Roaring Twenties, as stock prices scaled dizzying peaks, Wellington Fund adopted a balanced investment policy, holding stocks for growth and bonds for stability.

In October 1929, when stock prices collapsed, Wellington’s balanced strategy provided investors with some protection. Or, as Mr. Morgan put it, “As a result of our conservative philosophy and our management moves, the Fund’s asset value demonstrated a resistance to decline, a relative stability of value, unmatched by virtually any other investment trust or mutual fund in the last half of 1929.”³

Today, in our second investment principle, we describe these same benefits of balance in the slightly more technocratic language of modern finance: “Diversifying across asset classes reduces a portfolio’s exposure to the risk common to an entire class.”

Cost

Vanguard advises investors to minimize costs. After all, the lower your costs, the greater your share of an investment’s potential return.

This principle is not readily apparent in the Wellington heritage. Cost-consciousness was grafted on to the Wellington rootstock in 1975, when Vanguard opened its doors and picked up a bullhorn to champion the case for low-cost investing.

Today, cost-consciousness is a defining feature of the Vanguard family of funds. The relationship between lower costs and the potential for higher returns is a staple of academic and industry research. ⁴ And this newer graft to the family tree has exerted a powerful influence on older branches. In 1951, for example, Wellington Fund’s expense ratio was a modest 0.55%. Today, the expense ratio of the fund’s Admiral Shares is just 0.18%.

The Child is father of the Man. Or something like that.

Discipline

To succeed as investor, you must maintain perspective and long-term discipline, Vanguard’s fourth investment principle.

A hallmark of a disciplined investment program is periodic rebalancing. Rebalancing restores a portfolio to its target asset allocation, which can help you manage a portfolio’s risk and check the inevitable temptation to chase whatever asset class is performing best at the moment.

Wellington Fund has rebalanced its portfolio through 85 years of bear markets and bull, distinguishing itself as an exemplar of discipline and long-term perspective. Vanguard’s belief about the relationship between discipline and investment success can be traced directly to our Wellington roots.

Mission

A sense of mission isn’t a Vanguard investment principle, but I mention it because the trait is prominent from the Wellington roots to the newest branches of our family tree. At Vanguard, we’re on a mission to give clients the best chance of investment success. We try to accomplish our mission, in part, by explaining the benefits of, and providing clients with, broadly diversified low-cost portfolios such as Wellington Fund.

A sense of mission also animated the Wellington Fund’s creation and operation, as Mr. Morgan explained.

“The concept of conservative balance that was pioneered when Wellington Fund was born in 1928⁵  was simply one tributary in the river of mutual fund progress that brought to the average American family a modern method of investing. It is this investment method that will help to shape the financial future of millions of Americans in the years to come.”⁶

 

 

Notes: Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund wouldretire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.

Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

 

 

¹ As of 5/31/2013, according to data from Lipper, a Thomson Reuters Company.

² From Business Decisions That Changed Our Lives, “Main Street Comes to Wall Street—A New Investment Concept Is Born,” by Walter L. Morgan. Random House, 1964.

³ Ibid.

⁴ See, for example, Carhart, Mark M., 1997. “On Persistence in Mutual Fund Performance.” Journal of Finance 52(1): 57–82.

⁵  Incorporation papers were filed in 1928. The fund began operations on July 1, 1929.

⁶ Business Decisions That Changed Our Lives, 1964