Oblivious Investor/Mike Piper Looks at Vanguard's Managed Payout Fund

[jdmorton]

Mike Piper has a short article on Vanguard's Managed Payout Fund in this month's Oblivious Investor e-mail I got this week. I did a quick search here on E-R and found several threads over the past couple of years (including earlier this year) discussing Vanguard's Managed Payout Fund.

Mike concludes that this fund might be a good fit for those investors who:
"Are retired and drawing from their portfolios,
Appreciate the simplicity of an all-in-one fund and an automated distribution strategy,
Don’t have any qualms about active management, and
Find that the fund’s allocation is a good fit for their risk tolerance."

He does point out some features of the fund that investors should consider including the fund contains some managed funds in it, it is not the most tax efficient fund, and the monthly withdrawal rate is fixed at 4% based on the average share price over the past 3 years.

Anyway, I thought it might be of interest to some and it might reinforce the opinions others expressed in the earlier threads I mentioned above.

Here's a link to the Oblivious Investor web page: Oblivious Investor ? Low-Maintenance Investing with Index Funds and ETFs

 

[Brat]

I compared VPGDX to Wellesley Income. Their returns are similar. I like Wellesley better because that management team has been achieving good, steady, returns for many years.

 

[karluk]

I'm not sure if the 20% allocation to Global Minimum Volatility Fund is good or bad, but it's definitely new. The Minimum Volatility Fund was created just last December, so the decision for the Managed Payout Fund to include it in its portfolio has to have been made within the last year.

 

[Focus]

...the monthly withdrawal rate is fixed at 4% based on the average share price over the past 3 years.

This is an important point that I've seen missed on other threads. I'm actually intrigued by the Managed Payout Fund because of this feature and a couple of others.

Here's info that Vanguard put out when it merged its three managed payout funds into one:

https://personal.vanguard.com/us/insights/article/fund-announcement-w-10162013

 

[GTFan]

Wow, 73% allocation to stocks according to Morningstar. Very surprised that a retirement-oriented fund would be this high, but I guess that's a reflection of where we are with bond returns now.

 

[ESRwannabe]

Wow, 73% allocation to stocks according to Morningstar. Very surprised that a retirement-oriented fund would be this high, but I guess that's a reflection of where we are with bond returns now.

The pie chart counts the Market Neutral fund as stocks which isn't realistic. The benchmark for Market Neutral is cash...

It's really the classic 60/40 stock/bond AA with updates... The payout funds benchmark is 60/35/5 stocks/bonds/commodities with roughly 1/3 of stocks/bonds in foreign. That's the benchmark, the fund itself tries to beat it by making slight adjustments to AA.

Currently its taking 20% of stocks and put them in the low volatility fund, which is a good idea in my opinion as I think we are more likely to have a correction at some point then a positive spike. The fund also over weights emerging markets by 5% right now. I also agree with this as EM currently has better P/E than US and Europe. It also seems to keep a pretty permanent allocation of 10% to market neutral which would be like keeping 10% of fixed income in cash (not really, but that is the market neutral benchmark...).

Anyway, I am now using this fund in my Roth IRA. I am nowhere near retirement (about 20 years to go), which is fine. I just have the distributions reinvested. I'm trying the fund out for the AA and minor AA judgement calls made by the managers. At least so far I agree with all the slight AA adjustments they have made.

 

[Focus]

The pie chart counts the Market Neutral fund as stocks which isn't realistic. The benchmark for Market Neutral is cash...

It's really the classic 60/40 stock/bond AA with updates... The payout funds benchmark is 60/35/5 stocks/bonds/commodities with roughly 1/3 of stocks/bonds in foreign. That's the benchmark, the fund itself tries to beat it by making slight adjustments to AA.

Currently its taking 20% of stocks and put them in the low volatility fund, which is a good idea in my opinion as I think we are more likely to have a correction at some point then a positive spike. The fund also over weights emerging markets by 5% right now. I also agree with this as EM currently has better P/E than US and Europe. It also seems to keep a pretty permanent allocation of 10% to market neutral which would be like keeping 10% of fixed income in cash (not really, but that is the market neutral benchmark...).

Anyway, I am now using this fund in my Roth IRA. I am nowhere near retirement (about 20 years to go), which is fine. I just have the distributions reinvested. I'm trying the fund out for the AA and minor AA judgement calls made by the managers. At least so far I agree with all the slight AA adjustments they have made.

Great insights.

Also, I don't think Vanguard expects folks to put all their money into this one fund, so your other investments will alter your total asset allocation. From what I read on Vanguard's site, it appears to me they're assuming you'll put as much into the Managed Payout Fund as is needed to generate a 4% distribution that will fill a gap in your "floor" of expenses.

I didn't know about the possibility of having the distributions reinvested. Glad you mentioned that, since it could alter my strategy.

 

[ESRwannabe]

I didn't know about the possibility of having the distributions reinvested. Glad you mentioned that, since it could alter my strategy.

Yeah, if you wanted to you could completely ignore the payout feature. Just reinvest the distributions and then withdraw what you want. So if you wanted 3% instead you could just take 3% out at the start of the year or take that number and divide by 12 and then take that out each month. Just like you would for any other fund.

The nice part about the automatic 4% withdrawal option is if you felt your mental abilities might decline at some point, you could just go on auto-pilot then. Or another example could be if someone died before their spouse that isn't investment savvy you could tell them to just put it on auto-pilot and take that burden off the spouse if they needed that help.

I think the 4% is a good default withdrawal rate. Basically for the old 60/40 AA the rule of thumb was you could take 4% out each year and it would last 30+ years. This is basically just applying that same concept with updates on the new knowledge/thinking in finance such as adding 5% to commodities to smooth the volatility. My guess is the low volatility and market neutral funds also act as a way to reduce the volatility and make the withdrawals more consistent.

 

[ESRwannabe]

Just another quick note. You'll find a lot of people on Bogleheads forum saying they don't like the Market Neutral fund because its managed or they don't like that the benchmark is cash. Anyway, I do like the fund being in there as its a way to have pseudo fixed income that isn't dependent on the interest rates.

The way it works is that the managers go and pick stocks that they feel are under priced and buy those while at the same time finding stocks in the same sector that they feel are over priced and shorting those. The idea being that the two stocks will cancel out the broad market and sector market volatility, leaving you with a return solely based on how right they were on the under/over priced stock picking...

Whether cash is a good bench mark for this is hard to say, but it is I suppose a unique asset class. So far it has done better than the cash benchmark in all time periods.


Average annual returns—updated monthly as of 08/31/2014

1 Year 3 Year 5 Year 10 Year Since Inception 11/11/1998

Market Neutral Investor*
8.95% 3.23% 3.26% 2.81% 3.02%

Citigroup 3-Month US T-Bill Index**
0.04% 0.04% 0.07% 1.51% 2.26%

 

[Focus]

Just another quick note. You'll find a lot of people on Bogleheads forum saying they don't like the Market Neutral fund because its managed or they don't like that the benchmark is cash. Anyway, I do like the fund being in there as its a way to have pseudo fixed income that isn't dependent on the interest rates.

That aspect of it is attractive to me as well.