Benchmarking Managed Payout Funds

From Bogleheads

from Vanguard 2008 semiannual report

Benchmarking the Managed Payout Funds

The Managed Payout Funds seek to make monthly cash distributions while providing different levels of long-term inflation protection and capital appreciation.

Conventional performance reporting provides little information about the funds’ success in meeting their objectives. Most benchmarking methodologies assess a fund’s 6- or 12-month performance relative to that of an index or peer group. These comparisons can be considered measures of short-term opportunity cost.

Such measures are valuable, but the more meaningful question for investors in goal-based funds like these is: How has the fund performed relative to its goal? Has the Managed Payout Growth and Distribution Fund, for example, made monthly cash distributions while providing long-term inflation protection and capital appreciation? Other important considerations include the relationship between total returns and distributions and the volatility of these returns and distributions.

Over time, a sensible benchmarking approach will include multiple measures, such as a fund’s performance relative to:

• An inflation-based or absolute-return target, consistent with the fund’s goal of providing long-term inflation protection or a particular nominal payout rate.

• A so-called policy portfolio (that is, a long-term strategic asset allocation) that, in the board of trustees’ judgment, is consistent with the fund’s objective. A fund’s performance relative to a policy portfolio can highlight the effectiveness of any decisions to deviate from the benchmark.

• A peer group of funds with similar objectives (if an appropriate one exists).

The Managed Payout Funds began operations on May 2. Clearly, no measurement is meaningful over a two-month period. In future reports, we’ll provide a set of benchmarks that will help shareholders and the board of trustees to evaluate the funds’ long-term success in meeting their objectives.

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