The best? Vanguard Wellington or Fidelity Puritan?
Reprinted courtesy of MarketWatch.com.
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This discussion is about two giant funds — Vanguard Wellington and Fidelity Puritan — from two giant fund families. Each fund has thousands of loyal shareholders (fans, in other words) and more than three-quarters of a century of history to demonstrate what it can do for investors.
You won’t go wrong owning either of these funds. But in our opinion, one is better for you than the other. I’ll tell you the facts, and you can decide which is the better choice (all data comes from Morningstar).
The idea for this column came to me recently when a friend told me he had the bulk of his money invested in the Fidelity Puritan Fund, and it’s been there for decades. He is perfectly satisfied with this balanced fund, and I doubt I could talk him into moving his money elsewhere.
In fact, I have yet to meet any Puritan shareholder who has even considered changing, because Puritan is not very risky, and its return is widely regarded as “good enough.”
My friend did not ask me for an alternative suggestion. If he had, it would be Vanguard’s Wellington Fund, which also has a blend of equities and bonds as well as legions of happy shareholders.
When I put these two funds “up on the boards” for a side-by-side comparison, here’s what I found:
- Wellington, founded in 1929, requires a minimum initial investment of $3,000 (common for Vanguard funds) and has assets of $89.2 billion.
- Puritan, founded in 1947, requires $2,500 to open an account and has assets of $25.3 billion.
Neither fund charges a sales load. Both are actively managed. Each one maintains an asset allocation of 50% to 70% in equities, with the rest in bonds. (At this writing, equities make up 70% of Puritan’s portfolio, 65.5% of Wellington’s.)
As you can see, these funds are playing in the same ballpark.
But savvy investors will find the following three comparisons of compelling interest:
- Wellington’s operating expense ratio is 0.26%, vs. 0.55% for Puritan.
- Wellington’s portfolio turnover is 39%, vs 106% for Puritan.
- Wellington’s predominant equity asset class is large-cap value; Puritan’s is large-cap growth.
Most likely, you know why those comparisons are so important. Each has a significant impact on the returns you’ll get.
- The operating expense is something that nibbles into your returns every day. Neither figure is even close to outrageous, but Fidelity charges you more than double what you would pay to Vanguard. And every penny of that continuing charge is a penny of return that you won’t get.
- Portfolio turnover, also more than twice as high at Puritan, generates an additional cost you must pay for a more-active management. I can’t find any evidence that Puritan’s managers have provided higher returns by trading more. (The extra trading, by the way, can lead to higher taxes in taxable accounts.)
- The asset class matters, too. Both these funds are heavily invested in large-cap U.S. stocks. But Wellington’s value orientation is likely to yield higher returns over time.
The ‘taste test’
That’s the theory, at least. The proof, as they say, is in the pudding. Here are three “taste tests.”
- Wellington’s 30-day S.E.C yield is 2.39%; Puritan’s is 1.64%. One point for Vanguard.
- Over the 15 years ending April 30, Wellington’s compound return was 7.13%; Puritan’s was 6.18%. Another point for Vanguard.
- Wellington outperformed 95% of its peers in the balanced fund category; Puritan outperformed about 70%.
I could go on, but by now you undoubtedly understand that these funds, while similar, are far from clones.
In the real world, the difference between them adds up to big money. In a taxable account, $100,000 invested for 30 years at 5.74% (Wellington’s after-tax return) would grow to $533,555. The same investment at Puritan (4.66% after taxes) would grow to only $392,123.
Where logic fits in
I often wonder: What does it take to motivate an investor to make a change when there’s an overwhelming probability of making more money with the change than without it?
Logic in a case like this doesn’t seem to work. My friend is quite content to keep his account at Puritan. Do I have a duty or a right to try to take that comfort away from him?
Perhaps emotions are often strong enough that they just trump the facts. I can’t dictate your emotions, and even if I could I’m not sure I would want to. But I can educate you about the facts.
The facts I’ve presented regarding these two funds are all from the past. Wall Street — including Fidelity and Vanguard — can tell you all about the past. So can I. But you can’t buy the past, only the future. And nobody can tell you the future.
That is the fundamental and inescapable dilemma of investing.
Why the future may look like the past
However, in the case of Vanguard Wellington vs. Fidelity Puritan, I think the future is very likely to look a lot like the past. Here are three reasons for my view:
- Academics say that lower expenses lead to higher returns. Advantage: Wellington.
- Academics say lower turnover leads to lower costs and hence higher returns. Advantage: Wellington.
- Academics say that over the long haul, value stocks have higher returns than growth stocks. Advantage: Wellington.
Vanguard’s emphasis on passive investing (even though Wellington is actively managed) apparently does a better job of keeping investors from jumping ship, which historically has been likely to help them get better returns.
Investor returns take inflows and outflows into consideration in order to show the return received by the average investor — a figure that’s usually lower than the fund’s reported return.
Wellington’s investor returns for the past 15 years (6.23%) are significantly higher than Puritan’s (4.7%).
Wellington usually holds proportionally less of its portfolio in cash than Puritan, giving the Vanguard fund another edge, as cash is regarded as a “headwind” compared with stocks and bonds.
Of the two, Wellington is slightly less volatile, with a 15-year standard deviation of 9.61%, compared with 10.2% for Puritan.
That’s plenty to tip the scale in Vanguard’s favor. But there’s also this: If you invest $50,000 or more in Wellington’s Admiral shares, your operating expenses drop from 0.26% to 0.18%, adding 0.8% to all the returns I cited above.
Selling Puritan shares and reinvesting in Wellington won’t necessarily be worthwhile in a taxable account, as there will be capital gains taxes to pay. But for my money (and I hope for yours), Wellington is a far better home for new investments.
For more of my thoughts, check out my podcast “Seven reasons Vanguard is better than Fidelity.”
Richard Buck contributed to this article.