Prior to June 2008, Vanguard Wellesley Income (VWINX) was a perennial in The Rukeyser 100, where it consistently held a place on our Honor Roll. But that month longtime managers Earl McEvoy and Jack Ryan, who had helmed the fund for more than 20 years, passed the baton to a pair of new managers.

Since then John Keogh and W. Michael Reckmeyer have turned in an excellent performance. The fund ranked in the top 10 percent of their peer group in a tough 2008, though its performance fell closer to the bottom of the category in 2009. That wasn’t due to any missteps on their part; it was a reflection of the rally in more aggressive fare than what they favor.

Keogh and Reckmeyer take a straightforward approach with Vanguard Wellesley Income. They favor large companies with established and stable businesses, solid financial positions, and some room for improvement. Once Keogh and Reckmeyer have bought into a business, they tend to hold for the long term.

The end result is a fund that offers solid absolute returns and has ranked in the top 5 percent of its category on a three-, five-, and 10-year basis. Vanguard Wellesley Income has generated negative annual returns in only four years since its launch in 1976. Additionally, its low 53 percent turnover rate limits trading costs, holding the fund’s expense ratio at just 0.31 percent.

The managers favor a conservative allocation. A little more than 35 percent of the fund’s assets are allocated to equities and 60 percent falls into the fixed-income sleeve, with the remainder held in cash. With that kind of a mix–which is average for the fund, though bond heavy for the category–one might assume that the lion’s share of the fund’s 3.9 percent yield is generated by the fund’s bond holdings. This assumption is wrong.

At a time when the common shares of many blue-chip companies offer superior income streams to their 10-year bonds, the fund’s yield is almost evenly divided between the equity and fixed-income portfolios. While this is partly the result of the current market environment, Reckmeyer’s strategy for the equity portion of the portfolio is a major reason behind the fund’s yield.

Reckmeyer invests almost exclusively in stocks with dividend yields above that of the S&P 500, typically in the 3.5 to 5 percent range. Lately he’s been able to buy shares in companies such as California utility PG&E Corp (NYSE: PCG) and pharmaceutical titan Merck & Co (NYSE: MRK), both of which are light on debt and offer yields in excess of 4 percent.

Additionally, Reckmeyer favors value stocks and only buys shares that trade under his estimate of fair value. Lately that’s led him to overweight consumer goods, industrial materials and health care compared to his peers. Meanwhile, he is underweight in the financial services sector, which has seen valuations run high as bargain hunters flocked in.

On the bond side of the portfolio, Keogh looks for companies with stable to improving credit quality and strong cash flow. He also tries to avoid companies that use idle cash to buy back shares rather than pay off debt.

Like Reckmeyer, Keogh pays attention to valuations as he tries to maximize yield. But he’s not a deep-value investor and won’t hold bonds that don’t have clear upside potential simply to capture superior yields.

The fund’s bond portfolio currently has an average maturity of 8.9 years and an average duration of 5.8, sneaking it into the intermediate bond classification. The bond sleeve’s average credit quality just makes the investment grade cut at BBB.

While the construction of his side of the portfolio seems to indicate that Keogh is sanguine on intermediate-term interest rates, he’s clearly finding a dearth of opportunities in corporate bonds. Treasury, agency and government mortgage-backed securities play a larger-than-average role in his holdings.

While Vanguard Wellesley Income isn’t a highflier, it consistently generates solid returns and tends to maintain superior yields relative to its peers. Given that its managers avoid technology and other speculative sectors, the fund will usually miss out on hard and fast bull runs in the broader markets. Still, its consistency in both rising and falling markets makes it a solid core holding for most investors, particularly those who are more conservative.

Anyone seeking a more aggressive investment vehicle might want to look for a traditional pure-growth oriented fund.