Intro and Income Fund Question

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
SandDollar
Posts: 21
Joined: Tue Apr 01, 2014 11:08 am

Intro and Income Fund Question

Post by SandDollar »

What a fantastic forum. I can’t express enough how pleased I am to have found Bogleheads. I have no idea why it took me so long. I’ve always enjoyed personal finance and have an education in finance but I haven’t spent the time (or the right kind of time) I should have on my own portfolio. Now I realize what I’ve been missing and look forward to participating. So far, despite my education, about the only thread I’ve had the ability to weigh in on was regarding boxed wine, in the consumer section, from a few weeks ago (shows where my priorities have been :D ).

I’ve been preparing my own portfolio review question, however, something more urgent has come up and I would appreciate any advice.

My mother-in-law bought (and is about to by $100K more) Franklin Templeton Income (FKINX) from her “advisor” at her local bank. She doesn’t know the share class but is paying a load to reduce the expenses going forward, so I'm assuming class A shares (whatever the class of share, I’m assuming none would be approved by this forum). From what I can tell, they sold her on this fund because of the monthly dividend distribution rate. I’ve never paid attention to these kinds of funds - how can the 30 day standard yield be ~3% but the distribution rate be >4%?

Her objective seems to be to have a chance to maintain or grow her principal while receiving income at a greater rate she would have from money markets. She realizes there is potential for loss.

Is there a Boglehead approved equivalent to this fund? VG Wesseley? If so, I’m assuming she would need to take the quarterly dividend AND sell enough shares along the way to achieve whatever her monthly/quarterly income goal (4-5%/year)?

I hope I have enough information posted for some help. Thank you for any advice.

NTJ (not The Jack)
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Intro and Income Fund Question

Post by ogd »

Hi SandDollar -- welcome to the forum!
SandDollar wrote:I’ve never paid attention to these kinds of funds - how can the 30 day standard yield be ~3% but the distribution rate be >4%?
There are several reasons for that, and it's probably a combination of all three.

1) Interest rates have gone down (despite the uptick last year), meaning funds have higher coupon bonds which are going to run out and lose capital from their current, premium, value back to par.
2) An unscrupulous manager can even intentionally buy premium bonds to drive up the yield and win the distribution yield comparison, at the cost of future capital like above. This is why the SEC mandated the SEC yield, and why it should be used for comparison always.
3) This last one is objectively benign: a persistently steep yield curve, which is what we have right now, enables higher yields to be extracted. See this thread and the longer one linked therein for details. However, the steepness is not a priori expected to persist, which is why SEC yield is still the reliable figure going forward.

The common thread is that the higher distributions cannot be expected to last.
SandDollar wrote:She doesn’t know the share class but is paying a load to reduce the expenses going forward, so I'm assuming class A shares (whatever the class of share, I’m assuming none would be approved by this forum).
Ouch. Loads are a terrible idea; a significant portion goes to the bank that sold her the fund, which is why they're so happy to do that. The fee is relatively high even after the load (0.62%, if I'm not mistaken).

FKINX uses higher risk bonds than comparable Vanguard funds and it's riskier than its stock allocation would have you believe, which can be witnessed in 2008 where it behaved more like a stock fund than a balanced one. You haven't posted your MIL's exact details for a portfolio evaluation but good alternatives from Vanguard are:

LifeStrategy Conservative Growth -- a 40/60 fund that might be more appropriate for someone older looking for stability.
LifeStrategy Moderate Growth -- a 60/40 fund that matches what seems to be the FINA risk.
A Target Retirement fund of choice
(the above are all Boglehead-approved all-in-one funds that she wouldn't need to fiddle with, which sounds like she doesn't want)
Tax-Managed Balanced -- 50/50 and uses muni bonds, most appropriate for higher bracket investors in taxable accounts
Wellington -- 60 / 40 (ish) fund, was safer than FKINX in 2008, active but cheap
Wellesley -- 40 / 60 (ish), might be more appropriate.

I don't think any of these produce income to the levels of FKINX, but they are safer or better performing or both, not in small part because of those fees. There's no shame in selling some shares to supplement, particularly when points #1 and #2 mean the income would lead to principal depletion anyway.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Intro and Income Fund Question

Post by dbr »

Be sure you understand that unless a fund works some kind of magic free lunch (There are no funds that do this.), it is of no advantage to choose a fund because the dividend paid is high or paid at a frequent interval. Most any fund company will arrange to distribute fixed amounts of money from an account on a monthly basis or it will be possible to write checks against a fund. These are transactions that have to be tracked for taxes, but so are dividend payouts. Most people can manage with quarterly rather than monthly payouts.

Vanguard does have a managed payout fund, but the philosophy behind it is misguided, the fund is not recommended, and practically no one is invested in it.

Loaded funds of whatever share class are a blatant rip-off and your mother-in-law should not be invested in that fund. Low cost funds are available from Vanguard and even other mutual fund companies.
Topic Author
SandDollar
Posts: 21
Joined: Tue Apr 01, 2014 11:08 am

Re: Intro and Ioneonncome Fund Question

Post by SandDollar »

Thank you ogd and dbr.
You confirmed my suspicions and I appreciate the feedback.
I will definitely try to steer her toward one of the VG funds (likely LS Conservative Growth or Wellesley).
Post Reply