Managed payout funds off to a rough start

[UncleHoney]

The Vanguard blurb on the managed payout funds. With a calculator.

New to me, I don't know anything about them.

https://personal.vanguard.com/us/funds/vanguard/ManagedPayoutList

 

[FinanceDude]

In "theory" they will work, "reality" is often different. If the current market conditions persist over time, I see "supplements to the prospectus" coming out shaving the payout rates downwards a bit.......

 

[cute fuzzy bunny]

They made a change to the prospectus. So far their fancy new web site is choking when I try to view it. Might just be punctuation.

 

[FinanceDude]

They made a change to the prospectus. So far their fancy new web site is choking when I try to view it. Might just be punctuation.

Interesting that their web site chokes on a prospectus change..........

 

[cute fuzzy bunny]

I figured it out, sort of. Seems that PDF's are working fine from vanguard to internet exploder, but they wont work to firefox. The MP prospectus hangs in the same place every time, around 257k.

Regardless, I cant look at a 90 page document and see what, if anything significant, that they changed.

 

[WilliamG]

How are these puppies doing?
When will they re-calibrate the monthly distributions?

 

[Rich_by_the_Bay]

I wouldn't be surprised if they are withering on the vine. Definitely not designed for a down market early after purchase.

 

[explanade]

There was a WSJ article. Some of them with 2010 target date have lost 38% in 2008, worse than the S&P. One was an Oppenheimer fund with 40% bonds but that segment used some kind of derivatives with bonds.

 

[FinanceDude]

I wouldn't be surprised if they are withering on the vine. Definitely not designed for a down market early after purchase.

Typical Wall Street "wizardry". Come out with a product to combat defined benefit pensions going bye-bye, and launch them right before the worst market in 20+ years..........

 

[Rich_by_the_Bay]

Typical Wall Street "wizardry". Come out with a product to combat defined benefit pensions going bye-bye, and launch them right before the worst market in 20+ years.

Yup.

Their problem is not that they will run out of money, but rather that all their marketing is based on their "advertised" payouts of, I believe, 3, 5, and 7% for the various flavors. At that rate in this recession they are doomed to have a lot of unhappy investors.

Then again, those same investors took a leap and probably wouldn't have done better anywhere else.

 

[ziggy29]

The open question remains whether or not the bad timing of the introduction of these products will ultimately kill them in the marketplace.

 

[FinanceDude]

The open question remains whether or not the bad timing of the introduction of these products will ultimately kill them in the marketplace.

They are stuck for current investors. They can always issue a supplement to their prospectus that gives them the right to lower the guaranteed payout if the market is terrible...........

 

[samclem]

They are stuck for current investors. They can always issue a supplement to their prospectus that gives them the right to lower the guaranteed payout if the market is terrible...........

Or, just keep paying the 3%, 5%, and 7% and erode the NAV of the funds. Some closed-end funds have done this. They could keep making the stated payout as the NAV becomes asymptotic to zero. "Just like clockwork, the checks keep coming. Here it is the year 2015 and I got 7% of my entire balance of 92 cents."

Vanguard should not have gotten into this business. I wonder what Bogle said about this?

 

[Gearhead Jim]

Of course, if the markets were up then we'd all be talking about how great these funds are.

I don't see much difference between a managed payout fund and a retired person with normal AA who uses Firecalc to project how much he can take out of his portfolio. What am I missing?

 

[Rich_by_the_Bay]

What am I missing?

The MPFs implied a commitment to distributing anywhere from 3 to 7% a year with annuity-like reliability. The solo investor hopefully makes no such assumptions in hard times.

But everything looks better in bull market.

 

[WilliamG]

I thought that the distribution was always going to be revised on an annual basis tied to the NAV at that time; i.e., folks will be getting their x% next year but it will be less than the past year. Kinda like an RMD that fluctuates with market value. If so, does anyone know when this revision takes place; i.e., maybe now on calendar year or on a fiscal year based on when the funds started?

 

[Gearhead Jim]

My understanding was that the distribution would be tied to NAV, but loosely. The idea was that "normal" fluctuations in NAV would not change distributions, only very large or prolonged changes. Speaking of which...

 

[rgarling]

I thought that the distribution was always going to be revised on an annual basis tied to the NAV at that time; i.e., folks will be getting their x% next year but it will be less than the past year. Kinda like an RMD that fluctuates with market value. If so, does anyone know when this revision takes place; i.e., maybe now on calendar year or on a fiscal year based on when the funds started?

This is true. According to the prospectus, the payout will be adjusted annually and tied to the previous 3 year fund performance:

=========

It is possible for a Fund’s monthly distributions to increase or decrease from one year to the
next because the scheduled monthly distributions during any calendar year are based on the
Fund’s performance over the previous three years. There can be no assurance, and there is
no guarantee, that the Funds will provide a fixed or stable level of cash distributions at any
time or over any period of time. An investment in a Fund could lose money over short,​

intermediate, or even long periods of time.

 

[FinanceDude]

The MPFs implied a commitment to distributing anywhere from 3 to 7% a year with annuity-like reliability. The solo investor hopefully makes no such assumptions in hard times.

Looks like they were trying to mimic a VA at lower cost..........

 

[WilliamG]

Thanks rgarling. That is what I was remembering. Funds were begun in May 2008, and I was wondering what the timing was of recomputing distribution based on performance. Also, wondered if they prorate this 3 year average first 2 years or stay the same for 3 years. Maybe folks who purchased funds can tell us?

 

[Rich_by_the_Bay]

Looks like they were trying to mimic a VA at lower cost..........

That's my take, too. Or even an "almost fixed" annuity given the gradual changes. And in the long run it will probably happen but I doubt their target market for this was looking for such a wild ride. Best publicity I've seen for a SPIA if true assured lifelong income is what they were looking for.

 

[WilliamG]

Just got word from my Vanguard Adviser hotline by Dan Wiener that this year's distributions will be down about 16-17% from last year and I infer from that that the reset is done on the calendar year.