Benchmarking managed payout funds

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.

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