Steady funds for a shaky market

Investors who are further from their goals or who are more risk-tolerant can check out the Vanguard LifeStrategy Conservative Growth (VSCGX) fund and the Vanguard LifeStrategy Moderate Growth (VSMGX) fund. These devote more money to equity funds and have done well in bear markets relative to their peers.

Vanguard Wellesley Income

A colleague recently told me that the Vanguard Wellesley Income (VWINX) portfolio, which keeps most of its money in bonds, was the first fund she ever bought.

My first reaction was to say that it seemed awfully conservative for someone whose retirement was still decades off. She retorted that she was looking for a one-stop fund that wouldn't burn an inexperienced investor.

Since then she has built a more age-appropriate asset-allocation plan around this fund, but she has never regretted her first purchase because the fund has been so reliable.

It has lost money in just three of the past 20 years and has done better than 97% of its peers in bear markets. And it has succeeded in delivering a steady stream of income with a portfolio of undervalued, high-yielding stocks and high-quality (mostly corporate) bonds. That the fund has held up well (better than nearly 90% of its conservative-allocation peers for the third quarter through Aug. 28) in the middle of a credit crunch with such a large corporate-bond stake is testimony to the security-selection skills of longtime fixed-income manager Earl McEvoy and his team from Wellington Management.

Wellington's John Ryan on the equity side is no slouch, either. He's leaving the fund next year but has a seasoned understudy lined up in Michael Reckmeyer III. My colleague argues that there are worse newbie-investor mistakes than buying this fund, and I have to agree.

Vanguard Short-Term Tax-Exempt

The Vanguard Short-Term Tax-Exempt (VWSTX) fund is cautious and consistent. Longtime manager Pam Wisehaupt-Tynan keeps the portfolio's duration, a measure of interest-rate sensitivity, low and its credit quality high. Low expenses allow the fund's conservative approach to work in its favor over time. Put too much of your portfolio here and you could run the risk of not keeping up with inflation or not seeing enough appreciation to meet your goals. It can take the edge off a taxable portfolio, however.

It's done better than 96% of its peers in bear markets and outpaced almost 80% of them in the current quarter through Aug. 28.

Vanguard Balanced Index

Once again, simplicity and low costs work in a Vanguard fund's favor. The Vanguard Balanced Index (VBINX) fund is a mix of 60% MSCI U.S. Broad Market Index (essentially the Vanguard Total Stock Market Index) and 40% Lehman Aggregate Bond Index, and it has produced reliable absolute returns.

It's done better than 86% of its peers in bear markets and has bested about four-fifths of them in the third quarter. The fund's correlation with the overall market is higher, but it's still a solid core holding.

Vanguard Wellington

TheVanguard Wellington (VWELX) fund is another old stalwart managed by the redoubtable Wellington Management. In June, my colleague Chris Davis highlighted this one of Morningstar's favorite "sleep-at-night funds" -- offerings that don't keep you awake at night wondering what they are doing.

Since then, the fund has acquitted itself relatively well. It had posted a 1.9% loss for the third quarter through Aug. 28, but that was still better than 82% of its moderate-allocation peers. Its long-term bear market rank also is still better than 86% of its rivals. And like its sibling Wellesley Income, the Vanguard Wellington fund has delivered consistent absolute results, losing money in just three of the past 20 years.

This article was reported and written by Dan Culloton for Morningstar.

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