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Wellington & Wellesley redux
ats5g 12-01-2005, 9:20 PM | Post #160983 | 
Hi all,

As a result of the recent, and not so recent, conversations about Vanguard's active and index balanced funds, I decided to do some investigation. Unfortunately, regressions for balanced funds are a bit trickier than stock funds, because there are two more factors, for a total of five factors. See Bill Bernstein's Rolling Your Own: Three-Factor Analysis for a quickie refresher on three factor analysis. And see F&F's Common risk factors in the returns on stocks and bonds for more info on the five factors. [** Special thanks to Vanguard for the return info for Wellington and Wellesley, and Jared Kizer for help on the two bond factors **]

Anyhoo, there was virtually no excess return for Wellington over a balanced fund of 60/40 S&P 500/bonds from inception [july/august 1929] to end of 2004. Of course, I'd bet a big part of that was the inferior returns prior to Vanguard taking over in 1978, and changing [or returning] the investment policy to value tilt. [See Reflections on Wellington Fund's 75th Birthday.] After 1978, however, Wellington does outperform a balanced fund of 60/40 S&P 500/bonds, as did Wellesley.

However, the question(s) are (1) Was this outperformance due to Wellington Management's manager skill or (2) Was this outperformance due to risk factor exposure [i.e. value tilt, small tilt, etc].

So, [drum roll please] here are the regression results [including regression equation]:

Regression Results

My preliminary conclusion would be that the majority of the returns of both funds can be explained by their exposure to stocks, value stocks, and longer term bonds. Oh, and I can't conclude that there is any manager skill. ;-(

- Alec

PS - I was too lazy to do Vanguard's STAR, but I'll be happy to share the factors for anyone wanting to do so. My email is alec_stanley[at]yahoo.com

Originally posted in thread: 45510
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