Vanguard hits reset button on its managed-payout funds

Firm gives strategy a fresh start after a rough five years

Oct 21, 2013 @ 3:18 pm

By Jason Kephart

The Vanguard Group Inc. is giving its managed-payout strategy a fresh start.

The indexing giant last week said that it will merge its three managed-payout funds, which are designed to build the principal investment along with inflation while making monthly payouts, into a single fund, in part to simplify the strategy for investors.

It also will give the strategy a fresh start with a new target after five years of struggling to meet its goal of keeping up with inflation.

Vanguard is eliminating the $110 million Vanguard Managed Payout Growth Focus Fund (VPGFX), which targets a 3% distribution, and the $804 million Vanguard Managed Payout Distribution Focus Fund (VPDFX), which targets a 7% distribution.

Both funds will be merged into the $531 million Vanguard Managed Payout Growth and Distribution Fund (VPGDX), which targets a 5% distribution.

After the mergers, it will be renamed the Vanguard Managed Payout Fund, and its target distribution will be lowered to 4%, which puts it more in sync with the so-called 4% rule for retirement spending.

The lowered distribution target also gives the fund a better chance for success than its predecessors had.

All three of Vanguard's managed-payout funds have struggled to keep payouts in line with inflation over their five-plus years of life. A big part of that has to do with the very unlucky timing of the funds' launch, which came in the spring of 2008.

“We got hit right out of the gates with the worst-case scenario,” said John Ameriks, head of active equity at Vanguard, referring to the financial crisis.

The payouts on all three funds still haven't recovered from the market's collapse.

The Managed Payout Growth Focus Fund, for example, had a monthly payout of $67 in June 2008 but paid out just $57 this past June, a 15% decrease, according to the Independent Adviser for Vanguard Investors newsletter.

The new 4% targeted distribution rate is a reflection of Vanguard's outlook for interest rates, which it expects to remain low, Mr. Ameriks said.

“We haven't set ourselves a hugely easier task at 4%,” he said. “The objective is achievable, but we're still going to have to add a little bit of value to achieve it.”

If the newly merged fund is able to keep up with inflation, it could help financial advisers in their search for retirement income options, said Josh Charlson, a fund analyst at Morningstar Inc.

“It's a good idea,” he said. “It could be one piece of a possible solution for generating the income needed in retirement.”


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