Bogleheads

[Gregory]

VG is planning on introducing a new series of income funds.

" Each fund is structured to provide steady monthly payments without dipping into capital."

http://tinyurl.com/3xoz7d

Greg
_________________
Pecuniae imperare oportet, non servire.
Fortuna vitrea est; tum cum splendit frangitur. -Syrus

[alec]

well, that's interesting to say the least. anyone have a link to the registration statement?

ETA: I found the prospectus. Looks like endowment type retirement income streams for 0.34%.

- Alec

[joe8d]

A little more detail here:


http://insurancenewsnet.com/ar....30b844acb3
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All the Best,
Joe

[zhiwiller]

I'm a bit confused by these as I've no exposure to them. If you buy the 7% one, you get 7% of the average NAV for the past three years per year? So if the NAV stays flat over those three years, you get 7% and if it dips you get less?

[Angst]

From the prospectus, this caught my eye. A first for Vanguard, no?

"Commodity-Linked Investments. The Fund may allocate a portion of its assets to investments that create exposure to the total return of a diversified basket of exchange-traded futures contracts on physical commodities. Commodities include real assets such as agricultural products, livestock, precious and industrial metals, and energy products. Commodity futures prices have a historically low-to-negative correlation with the returns of the stock and bond markets. The Fund's commodity-linked investments may not be structured to conform to the composition, weighting, roll dates, reset dates, or contract months of any particular commodity futures market index. The Fund's commodity-linked investments may consist of any combination of commodity futures contracts, options on commodity futures contracts, commodity-linked total return swaps, commodity-linked structured notes, and other commodity-linked instruments."

angie

[Ariel]

Very interesting development. It will be interesting to see how well the products work.

7% payout with capital preservation seems a pretty tall order if a bear comes around growling at the wrong time, no?
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Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)

[nisiprius]

[Ariel]

[Ariel]

[stratton]

Here's the fun part from the prospectus:

[Buckeye]

Didn't they just announce three new giant cap funds yesterday or the day before??

I can't seem to find any info on it though.

[Ariel]

[gte834s]

[Pacific]

Paul said:

[nisiprius]

[nisiprius]

Do these funds do anything you can't fairly easily do for yourself? Not that that's necessarily an objection to them, but it's a salient detail.

(Oh, tax management... of course... but virtually all of my assets are in tax-advantaged retirement accounts so that's not a concern...)

[mas]

[prh2s]

It's possible to get results roughly similar to those of the "managed payout" funds simply by investing in balanced/TR funds, having the dividends reinvested, and setting up automatic withdrawals at a fixed percentage.

The problem with both fixed-percentage withdrawals from balanced funds and these new managed payout funds (at least as I understand them) is that they don't make a lot of sense in tax-deferred accounts—where you'll eventually have to take RMDs based on life expectancy, thus complicating the simple X%-per-year plan—and they aren't a tax-efficient way to invest in taxable accounts. The price of complete simplicity appears to me to be just too high.

The kinds of investments Vanguard's proposing for the new funds is another concern, at least for me.

Patrick

[unclemick]

Hmmm - perhaps I'm getting too old and sceptical?, cranky?, curmudgeony?

Bogle's admonition(on a different subject) jumps to mind: 'Nothing Fails Like Success.'

Perhaps I'll hurry up and wait on this one. I did buy the new kids of the recent Past - Bogle's 94 Book, then Lifestrategy moderate, and most recently Target Retirement.

Interesting though - eh?

heh heh heh - since I'm big time trad IRA it will be interesting to see how RMD fits in - in about 6 years in my case.

[pkcrafter]

And we haven't even talked about the market timing aspects of these funds

This is something you might do with some of your retirement money as it would tend to smooth out distributions vs portfolio volatility. It will probably be attractive to those who don't really want to commit to an immediate annuity but still want some stabilization.

Paul
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[prh2s]

I just finished reading the prospectus. Am I the only one who thinks that Vanguard has lost its bearings? Its mind? Its soul (as Bogle would say)? I never thought I'd see the day that a Vanguard prospectus would offer "Plain Talk About Short Sales" (LOL!). We've come a long way from "common sense" investing.

Patrick

[Ken Schwartz]

[prh2s]

[alec]

I hope Jack doesn't need a new heart after hearing about these funds.

[Ken Schwartz]

[prh2s]

[Barry Barnitz]

Twenty five years ago, institutional endowment funds were investing in "exotic" investments such as international stocks and commercial real estate. Small retail investors had virtually no access to a diversified portfolio of these asset classes.

Eventually, endowment fund success with these asset classes led to commercial development of low cost retail access to these asset classes, and eventual acceptance of these asset classes by individual investors.

For over ten years, institutional endowment funds have had success investing in "exotic" alternate asset classes. As is typical, endowment success eventually trickles down to the retail level.

Significantly, Vanguard, as is usual for their paternalistic culture, is not yet giving small investors direct access to long/short , absolute return, or collateralized commodity futures as stand alone portfolios, but rather places them under the guiding hands of their quantitative index shop. Functionally, the small investor now has low cost access to an institutional Endowment Fund.

Twenty five years from now, your grandchildren will be investing differently than we do today, as investment vehicles and investment theory evolve.

Fifty years from now, our descendants will look back on us as investors, as we now look back at investors in the 1950's.

regards,
_________________

blb
December Birthday Celebration: Ludwig van Beethoven

[Kenster1]

News alert -- Vanguard just filed a name change request to the SEC...

Vanguard is re-naming these portfolio funds to 'Yale-Endowment Strategic Payout Funds'












.....just kidding....
_________________
SURGEON GENERAL'S WARNING: Any overconfidence in your ability, willingness and need to take risk may be hazardous to your health.

[Justin618]

After quickly skimming the prospectus I have some initial thoughts:

Pros -
apparently 50/50 equity allocation to Dom/Intl equity (not including domestic market neutral fund)

access to commodities, reit, tips, market neutral fund in one package - amazing diversification for a $3000 investment (or whatever the minimum will be)

Cons -
Forced payouts - I am not sure if I see the rationale, under the prospectus distributions will be funded with dividends, interest, cap gains and return of capital.

Market Neutral fund up to 25% of asset allocation.

"The Funds do not have fixed asset allocations. The assets of each Fund are independently allocated based on the Fund's investment objective and long-term performance target. The exact proportion of each asset class or investment held by a Fund may change to reflect shifts in the advisor's risk and return expectations. "


The moving asset allocation might be a deal-breaker for me - the asset allocation fund ruined the life-strategy funds for me. Isn't it an inconsistent investment philosophy to believe in low cost indexing and still advocate shifting asset allocations based on "risk and return expectations"?

I'll wait and see on this one.

Justin

[Kenster1]

Here comes the nouveau investing products from Vanguard...

'Active Investing with Index Funds'
_________________
SURGEON GENERAL'S WARNING: Any overconfidence in your ability, willingness and need to take risk may be hazardous to your health.

[nisiprius]

I'm torn: the stated "investment objectives" and "long-term performance target" of the Moderate Growth Fund are

a) exactly what I want

b) seem too good to be true

It certainly does simplify the investing life cycle, though. Two-stop shopping: put everything in the target date retirement fund until retirement, then in the managed payout fund thereafter. How long before they create a single fund that automatically switches from one to the other on the retirement date?

I feel a little cognitive dissonance between the phrase "capital preservation" and the phrase "moderate level of risk for the Fund."

And how do I feel about breaking the rule never to invest in anything I don't understand?

I need to sit down and work through the formula for calculating the monthly distribution and see if I understand what happens if the market does poorly.

If the market does well, the fund will meet all its goals and probably become very popular. If it doesn't, I assume--as I say I need to read the details and think them through, but I assume--that the fund's holders will both see their capital decline--it is only "preserved" in the "long run" and also see their monthly distributions decline.

I suspect a lot of retirees will be confused about this and have incorrect and optimistic expectations about what those numbers, like 5%, mean. The (draft) prospectus says clearly, of course, that "There is
no guarantee that the Fund will achieve its investment objective."

[stebul]

The baby boomers are beginning to retire. Most do not have traditional pensions. Many will like the idea of a stable monthly income that resembles a pension. Some will choose to annuitize their 401Ks.

I'm all for taking insurance companies out of the loop. If Vanguard can offer a product that comes close to an annuity without mortality expenses / fees, isn't that potentially a good option for many people who don't want to micromanage their own investments or worry about calculating safe withdrawl rates? Also the balance of the fund can be included in your estate -- no need to worry about losing money if you die right after you purchase an annuity. Cuts out one non-value added middleman.

I'm seeing quite a few pros here for many Americans.

[Dale_G]

This is certainly an interesting development.

If I were to hold this fund it would be part of an IRA.

The dividends wouldn't mean much - they would simply be reinvested - and my RMDs wouldn't necessarily come from the Managed Payout fund.

I am presently 50% equities & 50% bonds. I might have to change to 45% equities, 45% bonds and 10% FS (financial stew).

I'll go back and read the prospectus again, but it appears to me that all three of the Payout funds will hold the same portfolio - and the only difference will be the payout rates. Correct?

Dale
_________________
first we crawl, then we walk, then we run, later we use any available transportation

[nisiprius]

[mas]

[nisiprius]

I think I've got the fundamental proposition. Please critique my understanding. It goes something like this:

a) The fund managers invest in a bunch of real good stuff in a smart way, which, others in this forum tell me, resembles the way in which large universities manage their endowments. It uses some asset classes not readily accessible to small investors and therefore is not something any small investor could easily do for himself.

b) The fund calculates the experience of a hypothetical shareholder who buys 100 shares when the fund starts and holds them. If a real shareholder make a single initial buy, then holds, his experience will be in exact proportion to the hypothetical shareholder's: his number of shares and number of dollars will always equal C times the hypothetical shareholder's, where C is a constant, and the calculation used to determine the withdrawal rate could be made on his real account just as it is on the hypothetical account.

c) Each year the fund calculates the average balance in the hypothetical shareholder's account for the last three years, calculates 3%, 5%, or 7% of that value (depending on the fund) as the amount to be distributed for the upcoming year, and sets the monthly distribution accordingly.

The distribution is whatever the formula says it is, and what happens to the principal in the account is whatever happens to the principal.

The prospectus states goals, which are what the fund managers think will happen as a consequence of the distribution policy and of their ability to invest the funds. For the 3% rate, they think both the distributions and the undistributed fund value should grow faster than inflation. At 5%, they think the distribution and the undistributed fund value should keep up with inflation. At 7%, they think the distributions and remaining value should hold at a level dollar value.

The old rule of thumb is that an investor with a traditional asset allocation can draw down 4% to start, increasing with the cost of living subsequently, and expect to deplete his assets but have them last out thirty years. If I've got it, the "moderate" fund hopes to pay out 5% at the start and apparently have the principal and thus the distributions continue to increase at CPI-U. You get 20% more to spend and your nest egg keeps growing. Nice work! if you can get it.

There are two means by which returns get levelled or smoothed out, hopefully giving a smooth ride through a bear market.

1) The fund managers' ability to blend uncorrelated asset classes.

2) The three-year-averaging calculation used to calculate the distribution.

Consider the moderate or "5%" account, and again assume an investor who makes one lump-sum buy and then does nothing but take the distributions, thus paralleling the hypothetical investor used to calculate the distribution.

If the fund is doing well and growing rapidly, the amount distributed in a given year will be signficantly less than 5% of the account value. For example, if my account balance grows smoothly at 20% per year and shows a balance of $69444, $83333, $100,000, and $120,000 at the start of 2012, -3, -4, and -5 respectively, then my monthly withdrawals in 2015 will NOT be 5% of 120000/10000 = $500 a month. The average balance over the last three years is only $91728, so the monthly withdrawals will be only $382. A naïve investor who didn't read the prospectus might feel as if he were getting 3.8% rather than the expected 5%.

If the fund is doing poorly, the amount distributed will be more than 5% of the account value. For example, if we suppose the account now declines at 10% per year, so that the balance is 120000, 108000, 97200, 87420 at the start of 2015, -6, -7, and -8 respectively, then the average balance was $103337.17 and the monthly withdrawal will be $430 a month The naïve investor might feel pleased at getting 5.9% of $87420, instead of only 5%.

So, when the account value is growing, the three-year-averaging calculation effectively holds back a sort of rainy-day reserve and pays it out when the account value declines.

The three-year-averaging calculation doesn't seem like a bad idea, but of course it's the same thing any investor could use to decide on how much to withdraw from any portfolio.

(Something's nagging at the back of my mind. Does this averaging stabilize the fund? Or does it destabilize it? When the fund shrinks, the distribution calculates the distribution based on larger values from the past... so it distributes a larger percentage of the fund's actual current value... making it shrink faster than it would otherwise?)

The big question in my mind is what happens if it turns out that the goals are basically just a bit too ambitious. All of the funds, even the 7%, have a goal of capital preservation. If an investor puts in $100,000 and then lets it alone apart from accepting the withdrawals, and it is clear five years down the line that the number of dollars on the statement is inexorably shrinking and is down to $90,000, $80,000, $75,000, what happens? Everyone shrugs and says "well, it was just a goal?" Or the fund adjusts the formula and distributes less? Or what? I wonder.

[unclemick]

They say - hmmm - well that didn't work - merge with another fund and remain silent.

Isn't that what the other guys do?

heh heh heh - if you believe in progress - maybe this will work. Hey I took a flyer on that 'Un-American' Index 500 in 1977. Still digesting TR here so I'll watch a while - BUT???

[Murray Boyd]

This is a joke, right?

[Munir]

How can one obtain a copy of the prospectus for these funds? I called Vanguard, and the Flagship rep said they will mail it to me in December (!) since they are not currently available.

Munir

[Akriel]

A link to the preliminary prospectus for the Vanguard Managed Payout Funds was provided earlier in this thread. It was:
http://www.sec.gov/Archives/ed....ed485a.txt

Regards,
Akriel

[Munir]

"A link to the preliminary prospectus for the Vanguard Managed Payout Funds was provided earlier in this thread. It was:
http://www.sec.gov/Archives/ed....ed485a.txt

Regards,
Akriel"


Thanks, Akriel. When I had tried to access that web site earlier, I got an "error" message. Now it's functioning OK.

Munir

[pollendoctor]

This is structured to give retail investors access to institutional-type management. Now that your company isn't going to do it for you, Vanguard has decided to create a product that comes close.

This looks like this is designed for people to roll over their 401k in a lump sum, put it in one of the accounts, and spend the dividends as your retirement income.

If you think you (and spouse) will live only a few years, take the capital preservation or 7% option. Maybe someone in their 90s, or with chronic medical conditions. I would be nervous about being wrong here if there is no other backup.

If you think you will live a medium amount of time, pick the 5% option. Maybe a sprightly 80 year-old.

If you are 65, generally healthy, best take the 3% option.

I would think there are retirees who could mix the options to customize a withdrawal rate. Most should pick one, and stick with it.

Clearly, these funds would only be appropriate for someone who wants to set it and forget it. Some active management on an index base. It does look like there will be a separate management fee above what the underlying funds charge, but hopefully, this will be minimal.

I am not sure I would jump in, but the concepts are actually interesting.

[BostonBogle]

it's the world we live in...everyone's trying to sell you something...even vanguard...like all the other mutual fund companies...coming up with new funds....all competing for the money boomers have to invest for the future financial security....seems if you are a true boglehead you should just ignore all the new funds and stick to the basic index funds of which there already seem to be too many. whatever....it's like cnbc....they give you the standard investment advice...establish a long term plan and ignore the "noise"...then they proceed to broadcast nothing but "noise" 24/7.

[zalzel]

[zalzel]

[mickeyd]

With a .34 ER, this thing looks really gimmicky...exactly what my fellow boomers are waiting for.

No more need to do all of that managing and re balancing year after year, just dump your entire stash hear and live it up!.....aaaaaah you just caught me trying out a few new marketing ideas for this beauty.
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regards,
mickeyd

In Dire Need of: Faster horses, younger women, older whiskey, more money. (Not necessarily in that order)

[mas]