Vanguard Asset Allocation Fund tax distributions

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Note: On February 10, 2012 after shareholder approval, the Vanguard Asset Allocation Fund (Admiral and Investor classes) was merged into the Vanguard Balanced Index fund. This page documents historical data on the fund, which will drop out of the mutual fund data base.

Table 1. Summary of Historical tax factors
Fund Distributions.jpg Favorable tax factors Fund Distributions.jpg Unfavorable tax factors

Qualified dividends: Yes, (avg. 77% of income distributions)
Treasury interest: Yes, (avg. 11% of income distributions) [1]

Historical gains distributions : In latter years very low
High without loss carryforwards
Dividends: Higher than stock indexes
Bond dividends subject to taxation at marginal rates
Turnover: Moderate to high
ETF shares : No

The Vanguard Asset Allocation Fund was a questionable candidate for placement in taxable accounts. The fund used a tactical asset allocation strategy to allocate its investments across three discrete asset classes:

  1. US stocks, as represented by the S&P 500 Index.
  2. US bonds, as represented by long term treasury bonds.
  3. US cash, as represented by money market instruments. [2]

From 2000 to 2012, Vanguard reported the shifts in the fund's tactical asset allocation.

From 1994 - 2011 the fund was one of the underlying funds in Vanguard's series of LifeStrategy funds. The inclusion of a tactical asset allocation component to these funds was a controversial topic among forum participants, who often criticized this investment policy. [3] On September 30, 2011, Vanguard announced that the fund would no longer be a constituent of the LifeStrategy funds.

Distributions

The following table provides long term data on the Vanguard Asset Allocation Fund's history of dividend and capital gains distributions. (Complete data extends back to 1994. The fund began operations in late 1988 and distributed capital gains during its early years of operations). Qualified dividend data (with the exception of unavailable figures for fiscal year 2005) are provided, as are data on the percentage of treasury and government security dividends (which are exempt from state and local income tax in most states). Vanguard provides government obligations data back to 2004.

The tax efficiency of the fund was very dependent on the existence of long term carryforward losses. The fund's carryforward losses from the two bear markets in the first decade of the twenty-first century resulted in no taxable capital gains distributions since 2001. One should note that, without the benefit of loss carryforwards, the fund distributed considerable amounts of both short term and long term gains during the 1991 - 2000 bull market (see the second tab of Table 4 below for loss carryforward data).

Table 2. Vanguard Asset Allocation Fund
Historical Tax Distributions
Year Dividends Short Term Capital Gains [4]
Long Term Capital Gains Qualified Dividends Treasury Dividends FY Annual Return
2011 1.33% 0.00% 0.00% 100.00% 5.67% -1.35%
2010 1.78% 0.00% 0.00% 80.09% 27.90% 11.57%
2009 2.07% 0.00% 0.00% 91.08% 12.00% -9.60%
2008 2.11% 0.00% 0.00% 81.12% 0.86% -20.84%
2007 2.25% 0.00% 0.00% 65.23% 0.74% 15.69%
2006 2.01% 0.00% 0.00% 73.16% 2.95% 11.00%
2005 1.98% 0.00% 0.00% 2.75% 11.60%
2004 1.79% 0.00% 0.00% 71.11% 31.60% 12.75%
2003 1.39% 0.00% 0.00% 25.85%
2002 2.19% 0.00% 0.00% -16.41%
2001 3.16% 0.00% 1.11% -13.51%
2000 4.18% 1.40% 2.49% 11.36%
1999 3.49% 2.06% 2.06% 14.68%
1998 3.80% 1.70% 2.15% 15.24%
1997 3.96% 1.21% 3.40% 29.42%
1996 4.17% 0.00% 3.00% 15.27%
1995 4.41% 0.00% 0.00% 28.57%
1994 3.68% 0.03% 0.00% -2.05%


Tactical asset allocation changes

The following table provides the fund's tactical asset changes since 2000. The fund was managed from inception by Mellon Capital Management Corporation.

Table 3. Historical Tactical Allocation Changes
Date Stocks Bonds Cash
2011-09-30 62% 32% 6%
2011-08-17 90% 10% 0%
2011-05-20 100% 0% 0%
2011-03-16 90% 10% 0%
2010-10-21 80% 20% 0%
2009-10-14 70% 30% 0%
2009-05-01 80% 20% 0%
2009-01-29 90% 10% 0%
2008-11-02 100% 0% 0%
2008-01-05 90% 10% 0%
2008-01-03 100% 0% 0%
2007-12-10 90% 10% 0%
2007-11-29 95% 0% 5%
2007-10-22 90% 10% 0%
2007-11-24 80% 10% 10%
2007-05-17 80% 0% 20%
2007-02-12 90% 0% 10%
2006-05-24 100% 0% 0%
2006-05-03 90% 10% 0%
2005-01-26 100% 0% 0%
2004-08-17 90% 10% 0%
2003-11-13 80% 20% 0%
2003-10-02 90% 10% 0%
2003-08-04 80% 20% 0%
2003-07-17 90% 10% 0%
2002-12-31 100% 0% 0%
2002-12-03 90% 10% 0%
2002-07-16 100% 0% 0%
2002-07-12 90% 10% 0%
2002-06-18 80% 20% 0%
2002-11-05 70% 30% 0%
2001-12-11 60% 40% 0%
2001-11-19 70% 30% 0%
2001-11-02 80% 20% 0%
2001-10-25 70% 70% 0%
2001-09-21 80% 20% 0%
2001-07-26 70% 70% 0%
2001-05-18 60% 40% 0%
2001-04-23 70% 30% 0%
2001-04-12 80% 20% 0%
2001-03-16 90% 10% 0%
2001-02-13 80% 20% 0%
2000-12-19 70% 70% 0%
2000-11-02 60% 40% 0%

For the historical record the following table provides annual returns.

Table 4. Historical Annual Returns
Date Investor Shares Admiral Shares
2010 15.50% 15.58%
2009 17.92% 18.07%
2008 -36.39% -36.34%
2007 6.58% 6.70%
2006 16.02% 16.12%
2005 5.50% 5.12%
2004 11.09% 11.20%
2003 26.42% 26.64%
2002 -15.50% -15.34%
2001 -5.30%
2000 4.91%
1999 5.21%
1998 25.40%
1997 27.32%
1996 15.73%
1995 35.46%
1994 -2.32%
1993 13.49%
1999 5.70%
1991 27.74%
1990 0.89%
1989 23.68%

Tax analysis

The following tables examine the tax consequences of holding the Vanguard Asset Allocation Fund in a taxable account. Due to the major impact of loss carryforwards on fund tax obligations, the spreadsheet table includes three tabs which show returns and tax regimes. The tables include a 5% state tax rate (which of course may vary according to state). [5]

The tables include:

  1. An average tax cost table, which uses the life of fund average dividend and capital gains distributions and applies the current tax regime percentages of qualified dividend and government bond interest exclusion figures to the averages. The current tax regime, as well as a regime which eliminates qualified dividends and raises marginal tax rates and capital gains rates is examined.
  2. An average cost table for the period 2004-onwards (tab 2), which incorporates the qualified dividend tax regime, as well as a period when the fund utilized loss carryforwards to avoid taxable gains realization. As the fund retains carryforwards extending through 2017, this table provides a more accurate illustration of the fund's expected tax efficiency through 2017. The current tax regime, as well as a regime which eliminates qualified dividends and raises marginal tax rates and capital gains rates is examined.
  3. An average cost table for the period 1994-2003 (tab 3), which examines a period when the fund's dividend and interest earnings were higher and when the fund consistently realized taxable gains. The fund did not accrue loss carryforwards until 2002. The current tax regime, as well as a regime which eliminates qualified dividends and raises marginal tax rates and capital gains rates is examined.



Table 6.

See also

References

  1. source:US government obligations data
  2. Vanguard described the tactical strategy as:
    Vanguard Asset Allocation Fund seeks to maximize long-term total return while incurring less stock market risk than a fund made up entirely of stocks. It invests in a combination of stocks, bonds, and cash, exploiting opportunities created by temporary market misvaluations of the three asset classes. Employing a quantitative strategy, the fund actively allocates its assets among investments representing the performance of three broad asset categories: S&P 500 stocks, long-term U.S. Treasury bonds, and money market instruments. The fund may invest up to 100% of its assets in any one of the three asset classes. To determine the optimal portfolio mix, the allocation process considers expectations for relative performance, relative risk, and inflation.
  3. forum topic search: LifeStrategy funds and asset allocation fund.

  4. Table 7.

    source:SEC Edgar Annual Reports (2003 forwards);(1993-2003); and NSAR reports
  5. According to data from the Tax Foundation, state individual marginal tax rates range from 0% to 10.3%.

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