What's wrong with Managed Payout Fund (VPGDX)

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What's wrong with Managed Payout Fund (VPGDX)

Postby bobmoore » Wed Aug 04, 2010 10:23 am

I'm a soon to be retiree. All of my retirement income will come from my investment portfolio for the next 9 years when I reach age 65. Then I'll get social security (yeh, right!).

What is it people don't like about Vanguard's Managed Payout Growth and Distribution Fund (VPGDX). Is it expenses, asset allocation, or the seemingly high payout ratio? From reading this forum, it doesn't appear to be a popular choice. And the market cap of the funds seems low, another indication they're unpopular.

But what is it people don't like? I think the allocation and fees are good. And I wouldn't need to take the full distribution every year.
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Re: What's wrong with Managed Payout Fund (VPGDX)

Postby YDNAL » Wed Aug 04, 2010 10:54 am

bobmoore wrote:What is it people don't like about Vanguard's Managed Payout Growth and Distribution Fund (VPGDX).
Bob,
  • AFAIC, the investor should personally control the withdrawal from retirement accounts. Vanguard may indeed turn-out to be right that 5% is sustainable, but I rather make this determination myself.
  • With every distribution, you get return of capital.
  • Since January 2010, 69% of the distributions have been return of capital.
    Net Realized Cap Gain (YTD)* $0.00000 0.00%
    Net Investment Income (YTD)* $0.01965 31.00%
    Return of Capital (YTD)* $0.04375 69.00%
    Distribution $0.06340 100.00%

Managed Payout Growth and Distribution (VPGDX)
Last edited by YDNAL on Wed Aug 04, 2010 1:07 pm, edited 1 time in total.
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Vanguard Managed Payout Funds ?

Postby Taylor Larimore » Wed Aug 04, 2010 10:57 am

Hi Bob:

What is it people don't like about Vanguard's Managed Payout Growth and Distribution Fund (VPGDX).


* The Expense Ratio of .48% is among Vanguard's highest.

* 50% costly turnover (not in the E.R.) is among Vanguard's highest.

* Taxes. This fund is likely to be tax-inefficient (which doesn't matter in retirement accounts).

* Vanguard suggests this fund offers a reasonable secure payout lasting forever. It's current payout is primarily from principal which is not sustainable.

* Risk. Read this from Vanguard's website:

Vanguard Managed Payout Funds are not guaranteed to achieve their investment objectives and are subject to loss, and some of their distributions may be treated in part as a return of capital.

The dollar amount of a fund's monthly cash distribution could go up or down substantially from one year to the next and over time. It is also possible for a fund to suffer substantial investment losses and simultaneously experience additional asset reductions as a result of its distributions to shareholders under its managed distribution policy. An investment in a fund could lose money over short, intermediate, or even long periods of time because each fund allocates its assets worldwide across different asset classes and investments with specific risk and return characteristics. Diversification does not necessarily ensure a profit or protect against a loss in a declining market. The funds are proportionately subject to the risks associated with their underlying funds, which may invest in stocks (including stocks issued by REITS), bonds, cash, inflation-linked investments, commodity-linked investments, long/short market neutral investments, and leveraged absolute return investments.

Managed Payout Funds may not be appropriate for all investors. For example, depending on the time horizon, retirement income needs, and tax bracket, an investment in a Managed Payout Fund might not be appropriate for younger investors not currently in retirement, in IRAs or other tax-advantaged accounts for those investors under 59½, or for participants in employer-sponsored plans. Investors who hold a Managed Payout Fund within a tax-advantaged retirement account should consult their tax advisors to discuss tax consequences that could result if payments are distributed from their core account prior to age 59½ or if they plan to use the Managed Payout Funds, in whole or in part, to meet their required minimum distribution (RMD) obligations. Distributions from the Managed Payout Funds are unlikely to precisely match an investor's IRA RMD obligations. In addition, use of the Managed Payout Funds may be restricted in employer-sponsored plans by the terms of the governing plan documents and/or at the discretion of the plan administrator. Review the information carefully with your financial advisor before deciding whether a Managed Payout Fund is right for you.

Before investing, consider the Managed Payout Funds' investment objectives, strategies, risks, fees, and expenses. Contact Vanguard for a prospectus containing this information. Read it carefully.
"Simplicity is the master key to financial success." -- Jack Bogle
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Postby Chuck » Wed Aug 04, 2010 11:01 am

The short answer is that you can do better, on your own, more cheaply.
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Postby dbr » Wed Aug 04, 2010 11:02 am

If you are comfortable that you are controlling your withdrawal rate and not letting the fund con you into spending more money than is prudent, and if your tax situation is such that the tax inefficiency of reinvesting a taxable payout is minor, and if you like the asset allocation in the fund, then for you the fund* might be fine.

Many people would find that these funds accomplish nothing on the good side that might not be done better using something else.

*There is a choice of three funds.
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Postby SSSS » Wed Aug 04, 2010 11:06 am

It's 75% stock, 15% bond, and 10% "other" (I've heard they hold gold but don't feel like actually reading the prospectus); is that a suitable asset allocation for your goals & circumstances?

Also it includes a 10% allocation to Vanguard's "Market Neutral" fund which is pretty dubious on its own. It's actively managed, has by far the highest expense ratio of any Vanguard fund, and (by sheer coincidence, I'm sure) is by far the worst-performing Vanguard fund over the past year. When I check it a few weeks ago, Market Neutral was the only Vanguard fund or ETF to be negative over the past 1-year period.
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Postby CyberBob » Wed Aug 04, 2010 11:17 am

SSSS wrote:...Also it includes a 10% allocation to Vanguard's "Market Neutral" fund which is pretty dubious on its own. It's actively managed, has by far the highest expense ratio of any Vanguard fund...

The Market Neutral fund expense ratio does seem gargantuan when you first look at it, but it's really not that high. That large 2.80% expense number includes the dividends that are paid out for stock short positions. The actual expenses are a more reasonable 0.50%.

Bob
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Postby SpringMan » Wed Aug 04, 2010 11:30 am

You mention it is 9 years to Social Security at age 65. Consider taking Social Security at 62 in 6 more years. Based on your age (65-9)=56, you would not qualify for full SS at 65, it would be reduced. Of course it would be reduced more at age 62.
Best Wishes, SpringMan
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Vanguard Managed Payout Fund (VPDFX)

Postby BillRogers » Wed Aug 04, 2010 11:56 am

Hello Bob Moore,

Looking at the Vanguard Managed Payout Distribution Focus Fund Investor Fund (VPDFX) which has the lowest exposure to equities (i.e., 65%) of the three managed payout funds we can see the historical payouts and portfolio values from its inception date of April 23, 2008 through August 3, 2010.

Initial Investment: $1,000,000
Initial Close Price of Fund: $20
Shares Purchased: 50,000
Current Portfolio Value: $782,000 (i.e., 50,000 * $15.64)
Total Distributions: $136,775
Monthly Distributions 2008: $5,835 (Annual Rate: $70,020)
Monthly Distributions 2009: $4,915 (Annual Rate: $58,980)
Monthly Distributions 2010: $4,445 (Annual Rate: $53,450)

The above assumes that all distributions are spent and that the number of shares is constant throughout the time period. I hope this posting was helpful.

Best wishes,
Bill
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Re: What's wrong with Managed Payout Fund (VPGDX)

Postby nisiprius » Wed Aug 04, 2010 12:26 pm

bobmoore wrote:But what is it people don't like? I think the allocation and fees are good. And I wouldn't need to take the full distribution every year.
There are two problems to solve in retirement: 1) How to allocate one's portfolio, and 2) How much to withdraw every month to meet expenses.

If the size of the portfolio is, say, 40 or 50 times your desired withdrawal, then everything is easy. You can, in fact, probably live off dividends and interest alone without "invading the principal," and, quite possibly, having the principal grow fast enough to hold real value.

The problem only arises if you feel the need to squeeze more. One possible approach is annuitization, but that has a set of issues all its own. Another is to seek a combination of a portfolio and a withdrawal rate that lets you withdraw as much as possible, yet run a negligible risk of "portfolio exhaustion."

If you just want to regard the Managed Payout funds as a package of assets--an actively-managed package of assets--an aggressively-invested, actively-managed package of assets, and manage the withdrawals yourself, and you know exactly what you are getting, then there is nothing at all wrong with it. It's just another active fund. You could compare it to Wellington or whatever. It's just not particularly Bogleheadish, so you shouldn't expect much enthusiasm.

The stronger negative opinion arises because the Managed Payout funds are not presented simply as mutual funds, they are presented as a solution to a problem--using a portfolio to support retirement spending. The whole point is that you don't manage the payouts yourself, the fund does. You can go back and forth titrating the actual promises made in the Prospectus (none whatsover) against the implications made in the marketing material against the inference that people read in. But I think that it is very reasonable to say that the fund sets an expectation. Those expectations were, in fact, once stated as "management goals" in the prospectus but I believe they may have dropped them recently.

This is how I think the funds are presented by Vanguard. Am I being unfair?

a) Vanguard sets an expectation that you can spend the distributions from the Growth and Distribution fund every month, and still have the portfolio maintain real value (grow as fast as inflation) over the long run. What the portfolio lost in 2008-9 it will, it is assumed, earn back someday when the economy recovers fully, and the managed payouts are not so big as to prevent that from happening.

b) Those payouts will fluctuate annually, but by tolerable amounts; you can use them as an income stream to meet monthly expenses, there will be good years and bad years, but nothing you can't adapt to.

c) The payouts will approximate 5% of the real value of the amount you initially invested. This is very important, because it is higher than the traditional 4% rule-of-thumb.

d) The high value of 5% is made possible by two factors: the fact that the payout are allowed to fluctuate, and the fact that it has an unusually aggressive allocation for a retirement fund. The reason why the aggressive allocation is supposed to be OK is that these funds use the same diversification principals that college endowments use to minimize risk.

The point is--and the reason why I find them troublesome--is that their whole appeal is that 5% number. We've all read the SWR stuff, we all know that if we were content with 3.5% or 4% we could just use Wellington or Wellesley or Target Retirement Income or something.

The whole premise of the Managed Payout funds is that you can get a) more, b) safely than you can with the boring old traditional approaches. This is the premise I am skeptical about.

Nobody put a gun to Vanguard's head and said "Set the payouts (for Growth & Distribution) at 5%." They picked that number themselves. To say "That's not a problem because I'll only use 4% and reinvest the rest" is like saying it's not a problem that an iPhone drops calls when you hold it a certain way because you don't hold it that way.
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Vanguard Managed Payout Funds

Postby BillRogers » Wed Aug 04, 2010 1:12 pm

Hello nisiprius,

The Trinity Study looked at not just small withdrawals adjusted for inflation, but fixed monthly withdrawals based on the initial portfolio value. For example, a fixed annual 5% withdrawal rate of the initial portfolio value was successful 100% in all portfolios except the 25 and 20 year period for an all bond portfolio for the period 1946 through 1997. Of course the monthly distributions will fluctuate as the portfolio value changes, which is what I believe that Vanguard is doing.

I believe that Vanguard is taking an annual review rather than a monthly review of the portfolio. This is illustrated by the fact that the monthly distributions are adjusted annually each January. Thus I don't believe that these percentages are out of thin air.

For those interested in the entire Trinity Study, I have attached a link to the paper:


http://6aa7f5c4a9901a3e1a1682793cd11f5a ... ol1014.pdf

Best wishes,
Bill Rogers
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Postby stratton » Wed Aug 04, 2010 8:21 pm

Ignoring them as payout funds, about the only reason I can see for these is if you like the asset allocation and want to use it for making your own endowment like fund.

For example, they are approximately 70% equities. So if you split it 50/50 managed payout fund and bonds there would be about 35% in equity like investments. The problem is the managerial risk such as the market neutral fund had. It really stunk up the joint compared to others on the market.

Paul
...and then Buffy staked Edward. The end.
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Thanks everyone...

Postby bobmoore » Thu Aug 05, 2010 10:38 am

...for the thoughtful replies. I have a few important decisions to make before retirement, asset allocation is one of them.
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Postby nisiprius » Thu Aug 05, 2010 11:46 am

Bob, I would say this. The Managed Payout funds are unusual funds, particularly for Vanguard. They are unusual in their asset allocation and management, and they are unusual for their "managed payout" feature. You should always read the prospectus, but with these funds you should really read it.

I am not hinting at anything here; there's not anything awful there, I'm not suggesting you'll scream and run away when you read it, it's not my dish of tea but so what.

I'm just saying you really do need to read it. (Vanguard does not (yet?) offer any "summary prospectus" for these funds).

It is certainly very different from the Vanguard index funds. The asset allocation is not fixed; it by an advisor working under a framework set by a management committee, which uses "the collective professional judgment of its members." "The Funds do not have fixed asset allocations but have the flexibility, subject to applicable law, to invest substantially in a single asset class or investment." Broadly speaking the fund does define itself by what it invests in, but only by its goals for how it hopes the portfolio will behave.

The prospectus uses a symbol:

Image

By my count, this symbol appears twenty-six times in the prospectus, and I think due diligence would suggest glancing at all twenty-six of them. Of course it's mostly pro forma CYA stuff, the fund has bonds in it so it has to tell you about the risks most of us know bonds have, and so forth, so it's reasonable to glance at each one and skip over the ones you understand.

Just sayin', if Vanguard is actually going to go to the trouble of printing little flags in the prospectus, you should go to the trouble of looking at them.
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Postby R-Man » Thu Aug 05, 2010 1:28 pm

I fail to see the issue here. Nowhere does any of the fund's propaganda pretend that principle is not eroded as time goes by. If one is seeking a payout that may be rather constant year to year and understands that a portion of the payout is likely to be return of principle then where's the problem? Can you do the same on your own - quite well, can you beat the cost - again yes but if you are comfortable with the allocation then go for it.
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Postby riskreward » Thu Aug 05, 2010 1:51 pm

Managed payout funds generally get a bum rap on this board. They are more diversified than the Target Retirement funds with a greater foreign stock % as well as about 10% commodities. Target retirement funds have a larger gov't bond holding which could be troublesome should sovereign debt issues arise in the US.

The actual stock % of the least aggessive payout fund shows at 64% but 10% is invested in a market neutral fund so realistically it has about 54% purely unhedged stock investment which mirrors the 2015 target retirement fund.

The payout is based on the average fund price over the last 3 years. This helps the retiree to receive a steadier income stream. In a market that is trending down, the retiree will receive less payout year on year and will need to adjust spending (as it should be). In an uptrending market, the retiree will receive a greater year on year payout and can enjoy some of the fruits of that uptrending market.

A retiree taking 4 or 5% out of target retirement funds could get into trouble in a multiyear year down trending market by taking out constant amounts. The Managed Payout funds would automatically payout less in this scenario which forces necessary spending discipline on the retiree as a result of his shrinking assets.
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Postby nisiprius » Thu Aug 05, 2010 2:33 pm

riskreward wrote:The actual stock % of the least aggessive payout fund shows at 64% but 10% is invested in a market neutral fund so realistically it has about 54% purely unhedged stock investment which mirrors the 2015 target retirement fund.
I assume you refer to Vanguard Managed Payout Distribution Focus Fund Investor Shares (VPDFX), 64.5% stocks.

I care about stock allocation as a measure of risk. You are suggesting that it is unfair to measure risk by published stock allocation, and that VPDFX, by virtue of its nontraditional elements, should be considered to be comparable to a fund with a stock allocation of only 54%, and thus should be comparable to Target Retirement 2015.

Despite theory, we see that in reality VPDFX dropped farther than Target Retirement 2015 did. It clearly subjected the holder to more risk than Target Retirement 2015.

Image

If we plot it against several Target Retirement funds and choose the one with the closest match, to this eyeball it seems clear that the closest match is Target Retirement 2020 (green). And in fact it is a very close match indeed.

Image

Target Retirement 2020 is 67% stocks.

If VPDFX (blue) has comparable risk to 54% stocks, it should have been somewhere in between Target Retirement 2010 (50%) (red) and Target Retirement 2015 (60%) (orange).

I don't know why Market Neutral and commodities failed to work their risk-reduction magic, but in fact they did not.

VPDFX is 2/3 stocks and behaved just like any fund that is 2/3 stocks.
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Postby Alex Frakt » Thu Aug 05, 2010 3:51 pm

nisiprius wrote:I don't know why Market Neutral and commodities failed to work their risk-reduction magic, but in fact they did not.

Because that magic is based on backtesting over all conditions, as opposed to backtesting (or just thinking about what happens) during market collapses. Typically market collapses mean high volatility, low liquidity and depressed economies. Taken together that means the costs of hedging increases while commodity prices (with the occasional exception of gold) decrease. So your magic fails just when it's needed the most.
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Postby nisiprius » Thu Aug 05, 2010 5:40 pm

Alex Frakt wrote:
nisiprius wrote:I don't know why Market Neutral and commodities failed to work their risk-reduction magic, but in fact they did not.
Because that magic is based on backtesting over all conditions, as opposed to backtesting (or just thinking about what happens) during market collapses. Typically market collapses mean high volatility, low liquidity and depressed economies. Taken together that means the costs of hedging increases while commodity prices (with the occasional exception of gold) decrease. So your magic fails just when it's needed the most.
Well, market collapses happen from time to time, and if a fund company offers a fund that is intended to provide reasonably stable retirement income, and it is investing in 64.50% stocks (Managed Payout Distribution Focus) when other funds with the same objective are at 35.56% stocks (Wellesley Income), 29.15% stocks (Target Retirement Income), and 24.57% stocks (LifeStrategy Income), it is fair to say that Managed Payout is very different and fair to ask whether it's riskier and whether buyers understand that.

If someone is using Managed Payout as just a random old mutual fund in their accumulation stage, then perhaps expected standard deviations based on asset class correlations are a fair measure of risk, but if someone was using it for retirement income in decumulation during 2008-2009, then vulnerability to stock market plunges is a very relevant measure of risk.

Is it appropriate for Vanguard to put 2/3-stock Managed Payout Distribution Focus and 1/3-stock Wellesley at the same place on their risk scale?

Image

Image

Obviously, Managed Payout is not your father's retirement income fund. The people buying it are grownups and if they've read the prospectus and understand that they are buying something twice as aggressive as a "normal" retirement fund, then obviously there is no problem... particularly if they have no intention of using it as a retirement income fund.

As for backtesting, quite apart from the past-performance-future-results issue, there is another one: you cannot backtest the Managed Payout funds (or any actively managed fund) because "The Funds do not have fixed asset allocations." We can see what the Managed Payout funds actually did over the last two years, but there is no way to assess how they would have done in the past, because there is no way to know what asset allocation framework would have been made by the "investment committee" relying on "the collective professional judgment of its members," or on how the advisor would have acted based on "shifts in the advisor’s risk-and-return expectations."

OK, I must stop ranting. I've said my piece. I think the broad outlines are clear. How you regard them depends on your personal risk tolerance and how you plan to use the fund. But I insist that it is very different from other packaged solutions to the problem of providing retirement income. So different that if a traditional retirement income fund is appropriate for an investor, with a certain risk tolerance, than I do not see how a Managed Payout fund can be appropriate for the same investor. And vice versa, of course
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