Opinions on the New Income Replacement Funds

[W2R]

Given that I have a certain degree of faith that vanguard wont throw a bunch of idiots at the task and they have a nice selection of asset classes, I expect they'll invest reasonably towards the stated goals.

You may have already seen this - - from the VGPDX management page,

Vanguard Quantitative Equity Group
Firm Description
Launched in 1975, The Vanguard Group, Malvern, Pennsylvania, is among the world’s largest equity and fixed income managers. As chief investment officer and managing director, George U. Sauter oversees Vanguard’s Quantitative Equity and Fixed Income Groups. Since joining Vanguard in 1987, he has been a key contributor to the development of Vanguard’s stock indexing and active quantitative investment strategies. The Quantitative Equity Group manages indexed and structured equity portfolios covering U.S. and international markets. It has developed sophisticated portfolio construction methodologies and efficient trading strategies to deliver returns that are highly correlated with benchmarks. The group has advised Vanguard Managed Payout Growth and Distribution Fund since 2008.
Investment Manager Biography

Michael H. Buek, CFA, Principal

• Portfolio manager.
• Advised the fund since 2008.
• Worked in investment management since 1987.
• B.S., University of Vermont.
• M.B.A., Villanova University.

To me it sounds like Buek will manage the fund and make the decisions, and he will be advised by the more general Vanguard Quantitative Equity Group folks. All seem to be experienced and probably not idiots. It would be nice if it more clearly specified what Buek has done during the last 21 years other than "Worked in investment management". Maybe he worked managing another fund at Vanguard.

 

[cute fuzzy bunny]

He's run quite a few. Googling his name coughs up a ton of articles talking about what he does and how he does it.

Wharton Finance Conference 2006

Just as a point of interest and since nobody else pointed it out yet, I'm speculating just a little bit here in anticipation of picking up a little excess fund startup return. Most folks can just wait until the funds launch and their contents are expressed.

Of course with a fund like this, what is printed on paper one day may be wholly different from what the fund holds a few weeks later.

Especially over the first six months to a year.

I'm not that worried though. Do note that a bunch of vanguards balanced funds give them freedom to range a fair bit in allocations across 4-5 asset classes, and that many of them include the Asset Allocation fund, which could be anywhere from 100% equities to 100% bonds to 100% cash at any particular time.

This fund just has different asset classes than those.

 

[W2R]

Honestly, I am sooooo tempted!!!

"MUST...STICK...WITH...PLAN..."
"MUST...STICK...WITH...PLAN..."
"MUST...STICK...WITH...PLAN..."
"MUST...STICK...WITH...PLAN..."

 

[cute fuzzy bunny]

Nah, you should wait a while until you see whats what.

The 5% fund might be functionally equal to Wellesley, paying a quasi-swr payout and holding its own with inflation. The 7% fund might be super for people looking for a high initial payout without a forever horizon. The 3% fund might be good for those who dont need as much but want solid capital appreciation, more or less like a traditional US focus 60/40 balanced fund, but perhaps with more reasonable volatility and less US market risk.

All depends on if you buy into the slice and dice, US markets maybe not being what they used to be, and you're not too scared of formerly rare asset classes like commodities.

We'll see. Man, if I lose that sixty bucks though I'm gonna scream!

Of course, throwing in that extra 10% you may have had laying around in cash probably wont hurt. Might beat a lousy 2% MM rate we'll all be getting over the next couple of years...

 

[W2R]

I'm happy with Wellesley. It's just that this 5% fund (VPGDX) is sort of like a new toy, and it would be neat to get in on the ground floor. I can't help but think that Vanguard plans to do what is necessary to make it look really good during its first year, and the early bird will catch the worm. I don't think you're gonna lose your $60.

I do have some cash sitting in VMMXX that eventually I am going to have to do something with, if money market returns don't recover.

Maybe I'll study a little more about boring old bond funds. There is so much to learn but no time like the present.

 

[chinaco]

...
I'm not that worried though. Do note that a bunch of vanguards balanced funds give them freedom to range a fair bit in allocations across 4-5 asset classes, and that many of them include the Asset Allocation fund, which could be anywhere from 100% equities to 100% bonds to 100% cash at any particular time.
...

I would not be overly concerned about the the advisers or the Manager either.

If these funds are to be managed somewhat like an endowment, I would expect them to be somewhat conservative. I would expect some growth but not a sky rocket.

Still. There is some management risk. I like the idea of having a team sign-off on decisions (instead of one person). That should reduce the chances of somebody making a very risky move.

If the funds work out, I may use them also.

Would you put all of your eggs in that basket (VG MPO 5%) during retirement and use it as your source of income during retirement? It seems to me that this is how they are positioning the fund.

Where are Nords and Brew... they usually have a fairly sober POV and opinion on these matters.

 

[cute fuzzy bunny]

If these funds are to be managed somewhat like an endowment, I would expect them to be somewhat conservative. I would expect some growth but not a sky rocket.

It might be worthwhile to do some reading up on the Harvard endowment. The vanguard funds were referred to as the 'vanguard harvard endowment funds' internally for a time during their early development, indicating the investment approach they intended for them to follow.

The harvard fund invests in similar asset classes as the proposed vanguard funds and returned 23% in 2007 and have a 16.2% annualized return over the last 15 years and a 14.3% annualized return over the last 30.

And that was dragging around $35B in assets. Which means they had to put some money into some asset classes they werent as fond of, and more into asset classes than they may have felt appropriate.

A smaller version (at least for a while) might do even better.

Where are Nords and Brew... they usually have a fairly sober POV and opinion on these matters.

You saying I'm not sober?

 

[cute fuzzy bunny]

http://www.hmc.harvard.edu/pdf/johnharvardFY07- final.pdf

A very good read on the subjects of asset allocation, returns, the implications of more people/companies jumping on the bandwagon, and future expectations.

The last two paragraphs in particular are of strong pertinence to this discussion.

 

[cute fuzzy bunny]

The 5% fund went up a penny today, so thats another thirty bucks for me!!! Woo HOO!

Might just be the money market distributions being paid without any transactions posted before the fund goes live next week...

 

[chinaco]

It might be worthwhile to do some reading up on the Harvard endowment.
...

You saying I'm not sober?

God idea.


No telling what you FIREES do all day.

Just gathering various POVs.

 

[cute fuzzy bunny]

No telling what you FIREES do all day.

And for some of us, the right or the left hand?

 

[WilliamG]

Well, my Vanguard rep called yesterday. It's been almost a year since we did a plan with their rep. We will schedule a review in June. While on phone she marketed these new funds. Of course I still remember the planner last year hyping the Diversified Equity fund.

We have settled into our own self-managed "income replacement" approach with Wellesley as a key component. Since Wellesley has such a history AND I understand it, I am thinking it unlikely we want to change much at this time. Most of our assets are in regular IRA and current procedure is to have all dividends and interest routed to money market within IRA. Quarterly we move from this IRA to taxable money market from which we move monthly to bank checking for spending. Vanguard makes it really easy to schedule these types of moves automatically. Also quarterly we review overall for possible re-balancing which we base on tolerance ranges for each allocation. Current allocation which I posted in earlier thread:

7.5% REIT Index
12.5% International
20 % Total Stock Index (mostly)
35 % Wellesley
25 % Cash and Bond

Any comments or suggestions?

 

[jIMOh]

Current allocation which I posted in earlier thread:

7.5% REIT Index
12.5% International
20 % Total Stock Index (mostly)
35 % Wellesley
25 % Cash and Bond

Any comments or suggestions?

what does xray suggest your actuall stock-bond-cash allocation is (I am guessing around 40%)- are REITs stocks or bonds when xray is concerned?

what is annual yield of this portfolio?

 

[cute fuzzy bunny]

William...looks like you're around 45% equities and 55% cash and bonds? A reasonable ratio for a conservative investor seeking current income and not a lot of volatility.

The REIT and LCV component of Wellesley along with the TSM and conservative dollop of foreign give you some good core growth.

Basically if you added about 10% market neutral and 5% commodities in place of some of the bonds, and evened up the US and international holdings you'd have the Payout 5% fund.

I think!

 

[WilliamG]

Thanks for the replies.
Counting REIT as all stock and Wellesley as 35% stock, I calculate a smidgen over a targeted 50-50 split.
I'm projecting close to a 3% yield this year. We keep money markets allocated between 2 and 4%, so plan to usually reset to 4% and draw down to 2% if yield is less than what we need. If we need more before re-balancing ranges kick in, we will break off a little bit from bonds.

 

[mickeyd]

I am looking at these funds for a small part of my assets. I am currently eligible for a DB plan at a company that I worked for about 20 years, but have long ago left. They are now offering a lump sum distribution (RO?) option which was not available until now. If I could RO this lump into one of these funds and create an income that is greater than that offered as a pension payout, I may be willing to assume the additional risk myself in order to get a higher payout. The ER of around .54% is a bit steep for me, but I will have to do the math and evaluate the risk to see if it works for me.

 

[cute fuzzy bunny]

Its a little steep but a lot of that has to do with the market neutral fund and the commodity piece...the MN fund has a 250k minimum and there is no commodity fund available at vanguard. So rolling your own without adding outside funds is hard to do.

There are also some minimums and purchase/redemption fees you get to avoid. The ftse ex-us has a .25% purchase fee and the MN fund has a 1% redemption fee on shares held under a year and the ftse ex-us fund has a 2% redemption on shares held under 2 months.

So spendy, but I see where its going. I think it'll drop into the .35-.4 range once they build enough assets.

 

[cute fuzzy bunny]

The first real day of the new funds!

I'm as excited as a little school girl!!!

 

[chinaco]

Another article from Morningstar.

Six Things to Mull before Buying a Vanguard Managed Payout Fund - Morningstar Specialists

 

[cute fuzzy bunny]

Seems a fair assessment, although I still dont agree that they're entirely for "decumulation". The 7% fund certainly will act in that role, I find it curiously difficult to classify a fund that will be stuffed full of assets with high potential for capital gains like the 3% fund to be a "decumulation" fund.

And woo hoo! I'm up another $30!!!

This has been a great investment so far...its paid for all my Cinco de Mayo stuff and then some!

 

[W2R]

\And woo hoo! I'm up another $30!!!!

You're rich, I tell you, RICH!!!

By the way, little girls aren't always that excited. To the contrary! My first grade teacher was constantly giving me notes for my parents that said I was bored and daydreaming, not excited. (I was practicing for later, oh so exciting times in the working world.)

 

[Dude]

Seems a fair assessment, although I still dont agree that they're entirely for "decumulation". The 7% fund certainly will act in that role, I find it curiously difficult to classify a fund that will be stuffed full of assets with high potential for capital gains like the 3% fund to be a "decumulation" fund.

Well, this accumulator is anxiously awaiting the reveal of the holdings.....might xfer $25k from TR2035 into the 3% fund if tempted enough!

 

[cute fuzzy bunny]

We might have to wait a while for that. Maybe until the end of the next quarter.

I'm sort of hoping they reveal the initial holdings right away, but so far communications about these funds have been held rather close to the vest.

 

[cute fuzzy bunny]

Up 8c, 9c and 10c for the 7%, 5% and 3% funds today.

Woo hoo, I'm up a grand!

I think I need to put another quarter in and pull the handle again...

Still not posting any holdings, and my fancy pie chart still shows these funds as being "Other".

 

[WilliamG]

We might have to wait a while for that. Maybe until the end of the next quarter.

I'm sort of hoping they reveal the initial holdings right away, but so far communications about these funds have been held rather close to the vest.

I've always liked to see how Vanguard's Asset Allocation fund allocated its positions and it usually doesn't provide that information until well after the quarter ends so you are likely right.

Am having a Vanguard planner review my plan in June. My Vanguard rep called and pimped a little bit on the new payout funds in prep for my getting with planner. Will be interesting to see if they incorporate the payouts into their recommendation cookie cutter for us retirees. One question I will ask concerning each payout is how the planner would compare their risk/reward in terms of percentages in a stock/bond portfolio.