Managed payout funds off to a rough start

[REWahoo]

Of course it's too early to know how they will fare in the long run, but so far the new managed payout funds don't appear to be faring too well:

Managed payout funds show flaws

"The first mutual funds offering steady monthly income payments have been heralded as a watershed for investors who no longer have to cash out of funds when they retire.

But this year also has exposed some serious shortcomings in these new offerings: Large percentages of the payouts are coming from the fund's capital, and they may be eating themselves alive."

------------

"Seventy-seven percent of the payouts from [Vanguard's] Distribution Focus Fund (VPDFX) this year will actually come from the fund's capital, and it's a similar story for Vanguard's other two managed payout funds. For Growth and Distribution Fund (VPGDX) that figure is 71%, while 63% of distributions from Growth Focus Fund (VPGFX) have been taken from capital."

For now, I'm sticking with Wellesley.

(Oooops, almost forgot the psssst...)

 

[cute fuzzy bunny]

I'd like to hear vanguards side of the story before I'd rush to judgment.

The distributions have to come from somewhere. They can pay from their cash holdings, which are primarily original principal at this point because its a new fund, or they could liquidate a holding they just established a month or two ago at the fund inception.

The latter would create a short term capital event, the former unless I'm mistaken is tax free since return of capital is just giving you your money back.

I think the principal problem with peoples perception of these sorts of funds is that they're thinking of it as a traditional mutual fund where it holds stocks and bonds, throws off traditional dividends and you keep a separate cash pool account where the dividends land and where you put excess cash from selling assets. These have the cash pool built in.

In a down market, they're going to have to expend from the cash pool or sell investments to 'meet the payroll'. This is part and parcel of the traditional "4% swr" plan, where you take your distributions regardless of the market conditions.

The bad news is that such an arrangement doesnt allow you to make a decision to not take a distribution during 'bad times'. The good news is that its an arrangement that doesnt force you to make any decision!

Interesting to see that a fund is considered "full of shortcomings" during a bear market when its components are declining. By that measure, many funds are full of shortcomings lately.

Winding back around, I invested in these funds because I expected that vanguard management felt pretty good that the worst of the bear market was over. Seems they didnt quite get that right. But I dont see that the MP funds have declined any more or less than similarly stock/bond composed funds.

One other thing is that they still havent fully invested in all the asset classes they've advertised to get into. So far they dont seem to have put money into real estate, commodities, or any absolute return strategies. From what I've seen of those and my near term future expectations, thats a good thing.

 

[REWahoo]

Gotcha going this morning, eh.

Why are you up at this ungodly hour?

 

[chinaco]

The distributions have to come from somewhere. They can pay from their cash holdings, which are primarily original principal at this point because its a new fund, or they could liquidate a holding they just established a month or two ago at the fund inception.

True. Plus I thought those fund paid the percentage out because the intention is to produce cash to the owner.

If I took money from any of my mutual funds right now, I would be taking principal (if it were purchased in the last year or so).

I have confidence that those funds will be fine over a long haul. The Growth fund is obviously tilted toward a larger allocation of riskier securities... one should expect some bumps in the road during certain periods... but they should get the benefit of growth over time.


I am not ready to roll the dice on those funds in a big way yet... But I am watching them fairly closely...

 

[Dawg52]

Of course it's too early to know how they will fare in the long run, but so far the new managed payout funds don't appear to be faring too well:

Managed payout funds show flaws

For now, I'm sticking with Wellesley.

(Oooops, almost forgot the psssst...)

psssst...Wellesley down 3.62% YTD.

 

[REWahoo]

psssst...Wellesley down 3.62% YTD.

Psssst - Yield 4.81%.

I'm not eating any of my seed corn so far, just harvesting the dividends...

 

[REWahoo]

I have confidence that those funds will be fine over a long haul. The Growth fund is obviously tilted toward a larger allocation of riskier securities... one should expect some bumps in the road during certain periods... but they should get the benefit of growth over time.

Since beginning to withdraw from your nest egg in a bear market increases risk of long-term survival it stands to reason the same would apply to these managed payout funds, right? As CFB pointed out, looks like Vanguard could probably have picked a better time to launch these funds. But yes, time will tell...

 

[Dawg52]

Psssst - Yield 4.81%.

I'm not eating any of my seed corn so far, just harvesting the dividends...

Just pointing out that the principal of all mighty "Wellesley" is not immune to market downturns. I haven't studied the payout funds but if you picked one with with a similar allocation as Wellesley, does it not have a yield to cushion market declines? Maybe there are not any that conservative.

 

[REWahoo]

Just pointing out that the principal of all mighty "Wellesley" is not immune to market downturns.

Wasn't aware that I implied otherwise. Didn't mean to pssst you off...

 

[Rich_by_the_Bay]

Too soon to conclude anything about the MPF's performance, as indicated.

However, it does point out one reservation I have about them (don't own at this point): with my current plan, I can make sure that my distributions are coming from my cash or fixed income holdings while the market is down, even for more than 10 years. With the MPFs, the source of the distributions (stocks v bonds, etc.) is opaque to me. I have to assume the money is coming our pro rata from sale of shares, which I wouldn't personally choose to do in a seriously down market.

 

[cute fuzzy bunny]

Maybe there are not any that conservative.

Nope, they arent. They're pretty equity heavy. Apparently vanguard believes that higher equity allocations are the best way to produce an inflation offset payout, and that 'set it and forget it and take your monthly check' is a good option for some folks. There'll be plenty of volatility but once the markets return to normal a bit and they finish their asset allocations so that they're a bit closer to the endowment strategies they're supposed to be, that'll be less of a problem.

Plus I dont care about volatility.

 

[Dawg52]

Didn't mean to pssst you off...

I'm easily psssted when it's raining outside. Think I will go munch on some nails for brunch.

 

[Nords]

But this year also has exposed some serious shortcomings in these new offerings: Large percentages of the payouts are coming from the fund's capital, and they may be eating themselves alive."

I guess the real warning sign would be when the majority of the payouts to existing investors are coming from the funds of new investors.

I'm a little confused about these funds-- are they cheaper than an annuity, and are they somehow better than doing one's own dividend investing?

 

[ziggy29]

I guess the real warning sign would be when the majority of the payouts to existing investors are coming from the funds of new investors.

Well, since so many retirees today already rely on a Ponzi scheme to keep bringing in the retirement income, why not a second one for good measure?

 

[ats5g]

I guess the real warning sign would be when the majority of the payouts to existing investors are coming from the funds of new investors.

I'm a little confused about these funds-- are they cheaper than an annuity, and are they somehow better than doing one's own dividend investing?

Here's a quote from the prospectus:

Each Fund combines a unique managed distribution policy with an endowment-like investment strategy to generate regular monthly payments to investors while seeking to preserve their capital over the long term. The Funds’ managed distribution policies are designed to provide level monthly payments throughout each year, with payments adjusted each January based on a Fund’s performance over the previous three years. Like many university endowments, each Fund may invest across a wide spectrum of asset classes and investments—such as stocks (including stocks issued by REITs), bonds, cash, inflation-linked investments, and selected other investments—that are expected to add diversification and result in a more consistent return pattern than a traditional balanced portfolio of stocks, bonds, and cash.

 

[explanade]

Psssst - Yield 4.81%.

I'm not eating any of my seed corn so far, just harvesting the dividends...

Harvesting would mean taking dividends as cash, not re-investing?

What's the best way to get into Wellsley, lump sum or DCA?


On managed payout funds, you could presumably collect payments for 20 years and still have more than the original principal left, no?

Are those payments considered dividends or capital gains or both?

 

[REWahoo]

Harvesting would mean taking dividends as cash, not re-investing?

Yes.

What's the best way to get into Wellsley, lump sum or DCA?

Yes.*

I'll defer to others to answer your last two questions.




* This is akin to the 'pay off your mortgage early' debate - the answer depends on who you ask.

 

[cute fuzzy bunny]

The 3% "growth" fund is supposed to grow your principal in excess of inflation while paying 3%. The 5% "growth and payout" fund is supposed to maintain your principals value against inflation while paying 5%. The 7% "payout" fund is supposed to maintain your principals original value and pay 7%.

In theory, at the end of a 15-20 year period the 3% fund should pay more per month than the 7% fund, because the principal should have grown substantially while the 7% fund just held on for dear life.

In practice...?

Wellesley is a bit of a different beast. You'll get close to 5% at todays yield paid out a couple of times a year rather than monthly, and while its reasonable to expect that it'll maintain your principals buying power against inflation, I wouldnt be surprised to see it slip a percent off that mark every now and then.

Although its interesting to note that Wellesley did ridiculously well in the late 70's and early 80's during the high inflationary period.

 

[W2R]

What's the best way to get into Wellsley, lump sum or DCA?

While I am DCA'ing into the Total Stock Market Index and the FTSE All-World Ex-US Index funds, I noticed that Wellesley is much less volatile than either of these. Therefore, I have lump-summed into Wellesley.

It has gone down somewhat, but not drastically so I am fine with having lump-summed into it, personally. Like REW says, it depends on who you ask.

It pays really nice dividends quarterly, which is comforting during this market downturn.

 

[Alan]

Wellesley is a bit of a different beast. You'll get close to 5% at todays yield paid out a couple of times a year rather than monthly, and while its reasonable to expect that it'll maintain your principals buying power against inflation, I wouldnt be surprised to see it slip a percent off that mark every now and then.

It pays dividends every quarter and capital distributions at least once a year. Currently I have it it all re-investing but in ER I will be directing the dividends to a MM fund and letting the cap distributions re-invest.

 

[lawman]

Psssst - Yield 4.81%.

I'm not eating any of my seed corn so far, just harvesting the dividends...

If it's down 3.62% YTD doesn't that take into consideration the yield..I thought YTD figures assumed reinvestment of all dividends and capital gains..Am I wrong?

 

[Alan]

If it's down 3.62% YTD doesn't that take into consideration the yield..I thought YTD figures assumed reinvestment of all dividends and capital gains..Am I wrong?

The change in the NAV is -5.91% so if you have been withdrawing dividends that is what the residual value would have dropped.

 

[REWahoo]

If it's down 3.62% YTD doesn't that take into consideration the yield..I thought YTD figures assumed reinvestment of all dividends and capital gains.

Correct. The YTD return for Wellesley includes the reinvested dividend amount reflected in the yield number. One "apples and oranges" note - the yield is an annualized, not a YTD amount, defined by Vanguard as:

Yield. A snapshot of interest and dividend income from your holding. The yield, expressed as a percentage of the fund's net asset value, is based on income earned over a specified period and is annualized, or projected, for the coming year.

 

[Nords]

Here's a quote from the prospectus:

Which also managed to avoid answering both of the questions...

 

[cute fuzzy bunny]

Is it cheaper than an annuity? Well the ER is .57-.58ish and you get to keep your principal. For that you're maybe paying an extra .3% for someone else to peanut butter your money across about 9 asset classes, rebalance for you and sell assets/cut you a check once a month.

Considering some folks are spending 1% ER for a fund that they cant explain the content of or why they own it with actual data that shows it does what its supposed to do, I guess thats a pretty spectacular deal.

Its not exactly dividend investing, its more like endowment investing. You could do this yourself but some of the parts have front end purchase loads, very high investment requirements (100k+ minimum or institutional level mins) or would require that you cobble together a handful of funds, some ETF's and a few other odds and ends.

Read the Harvard endowment fund managers annual letter to John Harvard. Pretty much covers the contents, strategy and results. The 2008 version should be along shortly.
http://www.hmc.harvard.edu/pdf/johnharvardFY07- final.pdf

So far the vanguard funds havent yet invested in commodities, real estate, absolute returns or foreign bonds. I imagine those are coming when they feel an entry point is appropriate. Over the last few months I certainly havent missed them as they've fallen off a cliff.