I looked into Vanguard's managed payout funds several years ago and came away with a decidedly negative opinion of them. I would certainly like to hear from people with more favorable opinions, since I am more than willing to admit that the experts at Vanguard who put these funds together know a lot more about investing, protecting retirement assets, and systematic withdrawals than I do.
The first thing that struck me about these funds is how "gimmicky" they were. At first glance, the distribution looks like a relatively stable addition to one's retirement income. But of course it's not stable at all. The distributions can and will be reduced after extended periods of subpar investment returns. Even worse in some ways is that the distribution is only recalculated once per year and stays constant for an entire calendar year. That may work well most years, but how about 2008? The stock market had reached bear market territory by summer, 2008, and by late September it was already clear that a stock market crash of historic proportions was underway. Anyone with an ounce of ordinary common sense would have known long before the end of 2008 that major belt tightening was going to be needed, yet here were Vanguard's managed payout funds, blithely ignoring market conditions and still paying a fixed distribution every month until January, 2009.
Then I looked into the underlying investment portfolio being held by the managed distribution funds and found that with one exception all of the holdings were plain vanilla representatives of major asset classes, which could easily be duplicated by do-it-yourself investors like me. Vanguard's Total Stock Market Index fund currently comprises 40.1% of the growth and distribution fund, for example.
The one exceptional holding is Vanguard's Market Neutral fund, VMNFX, which has a $250,000 minimum investment and so cannot be purchased directly by anyone save extremely wealthy individuals. If you want it, you need to purchase one of the managed payout funds, or some similar Vanguard invementment that owns it as part of a broader portfolio.
Is VMNFX worth holding? Not as far as I can see. Vanguard compares its long term performance to three month t-bills and over the past ten years gives results showing that VMNFX has beaten t-bills over the past one and three years, but has lagged t-bills over the past five and ten year periods. Yuck!
But t-bill like returns might be acceptable if VMNFX were accomplishing something in the managed payout funds that couldn't be accomplished by holding t-bills directly. Is it? Unfortunately, the answer appears to be a definite "no". Vanguard describes VMNFX as follows: "This fund has a unique and complex investment approach, compared with other Vanguard funds. Its goal is to “neutralize,” or limit, the effect of stock market movement on returns."
So let's see how well VMNFX accomplished its stated goal of limiting the effect of stock market movement during the stock market crash of 2007-2009. Looking at the chart of the growth of a $10,000 investment over the previous ten years, I see that $12,471.89 invested in VMNFX in October, 2007, would have declined to $10,036.75 by March, 2009. That's a decline of 21.85%. Double yuck!
So my conclusion is that VMNFX does a vastly worse job of protecting assets in a major stock market crash than directly holding three month US treasury bills, which would not have declined in value by even one penny from October, 2007, through March, 2009. And for this inferior type of protection, investors are being charged a cool 1.71% annually, which is VMNFX's stated expense ratio.
Thanks, but no thanks, Vanguard. As far as I can see, I'm better off investing in your ultra low cost mutual funds on my own and deciding on my own "managed payout".
