To: Wellington Management Company Senior Officers
From: John C. Bogle
Date: March 10, 1972
“Some Thoughts about the Future of Wellington Fund
What is the future of Wellington Fund? This is a question that has no easy answers, and involves the most complex kinds of conflicts and considerations, including how to improve performance, dividend policy, future marketing strategy, obligations to existing shareholders, fee structure, relationship to other funds in the Wellington group, and so on.
Before turning to these questions, I have to say a word about (of all things) “Beta.” I am using Beta in this memorandum as a sim ple index of volatility-probably the best single measure of alu lyzing the character of Wellington Fund.
I. Wellington Fund has become a “different” fund than it was in the past. Wellington Fund’s Beta (or risk exposure relative to the stock market) is now at the highest level in our 42-year his tory. From a figure of 0.62 during the 1930s and 0.65 during the 1960s, the Beta had risen to 0.81 and then 0.82 in the past two three-year periods. Expressed simply, this means if the S&P 500 Index were to decline by 20 percent, Wellington Fund would be expected to drop 16 percent, as compared to about 13 percent under Wellington’s historical Beta averaging 0.65.
Yet the one characteristic that Wellington Fund has consistently offered to its shareholders has been relatively good “downside protection” (the result of its balanced asset allocation between bonds and equities). I conclude that our failure to show reasonable stability in the next market decline-and there will be one would be “the last straw.”
II. Wellington Fund, at the moment, can barely be considered a “balanced fund.” The Wellington Fund prospectus (consist ent with the SEC’s policy guidelines v h respect to “balanced funds”) stated that “… the present intention of management is that generally the Fund will have no more than 75 percent of its assets in common stocks.” Yet the fund’s equity ratio is now 81 percent. I have grave doubts as to whether we are meeting the in tment policy test specified in the Fund’s prospectus. It is clear that Wellington Fund has departed from its traditional balanced posture of 55 percent to 70 percent in common stocks.
III. Wellington Fund’s income dividend, partly as a result of an increasing common stock ratio, is in serious jeopardy. If a bad downside performance would be “the last straw” for Wellington Fund, a reduction in the $.11 quarterly dividend would be the very last straw. In the face of the performance problems of the past and the demise of the capital distribution, a dividen cut would be a disaster. Yet, at present, Wellington Fund is earning income at the annual rate of $.42. It appears increasingly doubt ful that, absent a policy change, we will have sufficient “adiust ments” to meet our $.44 paid last year.
IV. I conclude that “surgery” is needed with respect to re structuring Wellington Fund. Specifically, I ask each of you to consider the wisdom of having the Wellington Fund return to its traditional policy of greater conservatism. If we moved, for example, to a “60 percent commons, 40 percent seniors” invest ment position, we would accomplish (a) a return of Wellington Fund to its traditional investment posture, with a consequent enhancement of its downside protection characteristics; and (b) preservation of Wellington Fund’s identity as a balanced fund. If this is hardly a marketable concept at the moment, at least it is consistent with what 250,000 shareholders purchased in the first place.
I recognize that there are lots of risks in making a change like this -the worst of which, I suppose, would be a rampant bull market. But I believe the greater risk is doin othing-ignoring the significant change that has developed in the Fund’s investment characteristics, and disregarding a very serious income problem. In this change, in my judgment, is sown the seeds of a new future for Wellington Fund, even if in its old vestmen
What we appear to have done, perhaps unknowingly, is to Wellington Fund very nearly into an equity fund. Perhaps what we should have been doing is turning-or returning—Wellington Fund into an “income development fund”-that is to say, a fund with a realistic current vield, along with a growing dividend. Making such a change is risky, I repeat, but it seems a lot less risky with the Dow at 940 and bond yields at 7.25 percent-this is hindsight of course-than it might have been with the Dow at 400 and bond yields at 4.5 percent. In other words, my vie is that this change would be good long-term strategy, and may even be good short-term tactics.
Wellington Fund has more than 43 years of history. Wellington Fund is the foundation upon which our Company is built. In Wel lington Fund, to a major extent, lies the value and goodwill of the very name that we at Wellington Management Company apply to almost everything we do
When I wrote this memorandum, the term Beta was an obscure academic concept designed to measure risk. Ever the statistical devotee, I introduced the concept to a skeptical audience at the General Membership Meeting of the Investment Company Insti tute in May 1971. It did not go over well. One journalist in the audience was particularly unimpressed. He wrote: “John Bogle gave an academic speech about mutual fund performance. It was likely of interest only to those with a mathematical turn of mind, and those who track the next reappearance of Halley’s Comet.” But I was stuck with the Beta identifier. One of our portfolio man agers, who knew that the name “Bogle” was derived from a Scots word for devil or goblin, referred to me as “Beta Bogle, the data devil.” (I took that as a compliment.)”
P/S: From the Peak in 1972, S&P500 fell by 48% and it took 11 years to fully recover.
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