Benchmarking managed payout funds

The Vanguard Managed Payout fund follows the endowment and foundation investing model, which seeks to operate in perpetuity while preserving capital and regularly spending a certain percentage of assets. This model seeks to realize these objectives by broad asset-class diversification, a disciplined spending policy, and a focus on long-term performance. The Vanguard Managed Payout Fund addresses its two-fold investment objective in its 2016 annual report report:

"The Managed Payout Fund has a dual objective. In any given year, we try to outperform the benchmark on a risk adjusted basis, and in the long run we seek to provide a return that at least equals spending plus inflation. (If we spend 4% and inflation is 2%, the fund’s objective is to produce a return of 6% or more.) Meeting this objective is critical for making periodic distributions and preserving capital."

Policy portfolio
Vanguard benchmarks the Managed Payout Fund to the policy benchmark in the table below. Historically,Vanguard has used three benchmarks during the fund's existence, twice changing the benchmark. The fund's performance as measured by its historical tracking error is provided in the table referenced in the notes. Tab 1 refers to the asset allocation benchmark; tab 3 refers to the inflation target benchmark.

Managed fund payouts
The Vanguard Managed Payout Fund distributes income monthly according to a managed distribution policy. Vanguard reports the history of fund monthly per share income payouts. In addition, the fund can pay out an end of year payout.

The fund was originally one of three managed payout funds, each offering different asset allocations (growth, growth and income, and distribution portfolios), and each with a different payout percentage. In 2014 the growth and distribution funds were merged into the growth and income fund to produce the current fund. Prior to the merger, the growth and income fund managed distribution percentage was 5 per cent. Post fund merger, the payout percentage was reduced to 4 per cent.

The table below illustrates annual dollar income distribution, reflecting an approximate $100,000 dollar investment in the fund.