It's important for retirement investors to have the exposure to stocks that they need in order to help their money grow over time. However, many investors have trouble with the volatility that pure stock funds have, and they prefer more balanced funds that also have exposure to other types of assets. The Vanguard STAR Fund (VGSTX -0.56%) gives investors a mix of stocks and bonds to try to reduce volatility, and the fund has attracted $18.6 billion in assets as of May 31. With its goal of providing both long-term capital appreciation and current income for investors, Vanguard STAR Fund tries to meet all of the needs that retirement investors have. Moreover, rock-bottom costs are helpful for investors. However, a relatively conservative stock allocation might make Vanguard STAR less than ideal for the youngest investors.
Vanguard STAR Fund's performance
The Vanguard STAR Fund has produced reasonably good long-term returns for retirement investors. Over the past 15 years, the fund has produced an average annual return of 6.3%, outperforming the average balanced fund handily. The fund's 15-year performance puts it among the top 17% of funds in its category, and Vanguard STAR Fund has also posted three-year and 10-year returns that put the fund in the top quarter of all similar funds.
As a balanced fund, Vanguard STAR Fund holds a sizable bond component, and so its distribution yield is fairly high compared to what many stock funds would pay. Currently, the fund carries a 30-day yield of nearly 2% as calculated for the Securities and Exchange Commission.
Fees and expenses at Vanguard STAR Fund
Vanguard STAR Fund's annual expenses are quite reasonable, although they're actually somewhat on the high side for Vanguard. The shares carry an expense ratio of 0.34%, which is less than half the average among balanced funds. The fund also carries no 12b-1 marketing fees.
In addition, like all Vanguard funds, Vanguard STAR doesn't charge a sales load. The fund also avoids purchase fees and redemption fees, and the only ancillary charges are account service fees for accounts with balances of less than $10,000 in the fund. However, you can also avoid this last fee if you sign up for electronic delivery of materials related to your account.
What Vanguard STAR Fund owns
Vanguard STAR Fund currently has between 60% and 65% of its portfolio in stocks, with roughly a quarter of its assets in bonds and the remaining 10% to 15% in cash. The fund invests solely in other Vanguard mutual funds, most notably the stalwart Vanguard Windsor Fund and its Windsor II sequel. International stock funds make up about 20% of the fund's total assets. On the bond side, the portfolio is split relatively evenly across a GNMA government mortgage fund, a long-term investment-grade corporate bond fund, and a short-term investment grade corporate bond fund.
Who manages Vanguard STAR Fund?
Vanguard STAR Fund's officers and trustees manage the allocation of the fund. The Vanguard Equity Index Group, led by Joseph Brennan, is ultimately responsible for the equity funds that Vanguard STAR owns, while Chief Investment Officer Mortimer Buckley looks over the company's Fixed Income Group.
Two managers have direct oversight over the fund, William Coleman and Walter Nejman. Both have been with the fund since 2013.
Is Vanguard STAR Fund a smart buy right now?
Vanguard STAR Fund has benefited from the strong performance in the bond market recently. Although the fund's corporate exposure has underperformed what Treasury bond funds have returned, low interest rates have produced big increases in bond values generally. The trade-off is that income levels have fallen, and if interest rates start to rise, then bonds will fall in value. Added income at that point might not be enough to offset capital losses.
Moreover, Vanguard STAR Fund has a set allocation that isn't always going to be appropriate for investors. Early in your lifetime, a roughly 60%-40% split isn't as aggressive as most investors should be. Once you're in retirement, you can make a case that the split is too aggressive. Because of that, some investors will prefer to go with a target retirement fund that automatically adjusts as you grow older.
Given how well the bond market has performed recently, the chief danger for investors in Vanguard STAR Fund is that a reversal could produce capital losses on the bond side of the portfolio. Nevertheless, as part of an overall retirement portfolio, Vanguard STAR can play a useful role in providing the balanced exposure that many investors want and need.