Any thoughts on VWINX versus VTMFX?

districtwanderer

I'm having difficulty making a fund selection and hope to tap the wisdom of this group for any thoughts you may have, particularly since many of you are Vanguard investors and may be familiar with the nuances of the two funds I'm contemplating.

Here's the situation: in order to simplify my financial life, I recently moved our "emergency fund" (equivalent to about 6 months of our living expenses) to a new and separate brokerage account at Vanguard. One reason is the ability to add small amounts to Vanguard funds on a regular basis--this is not an account we are looking to drastically grow, but still would like to pop in a few bucks a month.

Half the funds are kept in cash; the other half will be in a conservative Vanguard fund. I'm really torn between the Wellesley Income fund and the Tax Managed Balanced fund, mostly because of taxes since it is in a taxable account. How worried should I be about this? VWINX has high portfolio turnover, and is certainly not as tax-efficient as VTMFX. However, Wellington Management is without a doubt stellar, and I think there is an opportunity for downside protection. VWINX held up quite nicely in 2008 and 2011. I also prefer the more conservative allocation of VWINX.

I anticipate this to be a *very* long-term holding, so I'm not concerned with short-term gains, but should I be considering the tax equation more and opt for VTMFX? Your thoughts are greatly appreciated.

bee

Per M* tax data:


A combination of performance in both up and down markets makes VWINX compelling.
VWINX worst year wasn't much different than VTMFX/Cash, but much better most other time.

Edmond

District: VWINX is slated to be a long-term holding for me -- targeted to be 20% of my portfolio as I near/go into retirement. So I am biased. With that caveat, here is a thought...

Our current bull-market is long in the tooth. There is a high likelihood the stock market will encounter a "bear" within the next 3 years (for all we know, we may already be in one). If this sounds reasonable, I would suggest that purchasing the lower-beta of the 2 funds (VWINX) would make sense. If (when) the bear commences in earnest, and the stock market is significantly off its highs, you could then swap VWINX for VTMFX -- you may be "lucky enough" to realize a modest loss for tax-purposes at that time. -- And taking a position in the higher-beta fund only after investor sentiment (and prices) are less exuberant. ---

The "worst" that could happen if you did the above, is that we would experience no bear market for a prolonged period. -- In which case, you would still be holding a superb fund (VWINX)....

claimui

VWINX is a newly added holding for me. Given that it has income as a main goal (and even "income" in the name), I am not sure it is suitable in a taxable account unless you do indeed want the income. That said, I took a quick look at the past distributions of VWINX vs. VTMFX, and I crudely estimate the annual income to be about 5% for VWINX vs. 2% for VTMFX. So if you're investing, say, $100k, then that comes out to be about $3000 of extra taxable income for VWINX vs. VTMFX. Depending on your tax bracket, that may or may not be a big deal.

msf

Wellesley is generating income from taxable bonds, taxable as ordinary income. VTMFX is generating income from tax-free munis, and qualified dividends taxed at lower cap gains rates. So its $2K of income is worth more after tax than the first $2K of income from Wellesley. That narrows the gap, even for current income. And VTMFX should have more long term growth (higher percentage of equity).

I'm offering no opinion (in this post) on which fund is the better choice. Just commenting on the figures. The quality of the distributions (ordinary income, qualified income, or tax free) for the funds are different. Enough so that for any tax bracket one ought to take a closer look at the perceived income gap.

In addition, M* reports trailing twelve month yield from Wellesley as 3%, not 5% (VTMFX's trailing yield is indeed 2%). So even pre-tax, the gap may not be as wide as suggested.

I believe that claimui's 5% figure comes from the 2% of cap gains that Wellesley distrbuted last year. So one fund recognizes 2% in cap gains, while the other "lets it ride". You should be able to get similar (capital gain) income out of VTMFX by selling the shares when you want. If you need that gain as current income then sell shares periodically, otherwise the deferral of gain may be an advantage.