Launched to great fanfare in May 2008, Vanguard’s three Managed Payout funds are treading water as investors are looking, but not buying into the concept. Low interest rates and a bear market certainly haven’t helped, and distribution cuts are souring chances for a big pickup in demand.
On January 15, Vanguard announced that the funds’ monthly income payments would be cut more than 9% across the board for 2010. Since inception, those monthly payouts are down between 23.8% and 25.4% across the three funds. The Managed Payout funds make equal distributions every month and, each year in January, the rate of distribution is recalculated by Vanguard.
Assets in the three funds at year-end totaled just $415 million. After taking in $225 million or so in their first two months of operation, the funds are averaging just $8 million per month in net cash flows with some months running negative. Investors simply haven’t been convinced that the strategy or the vehicles are worthy.
| Total Returns | |
|---|---|
| Total Bond Market | 10.1% |
| Admiral Treasury Money Market | 1.2% |
| Managed Payout Distribution Focus | -10.6% |
| Managed Payout Growth & Dist. | -12.3% |
| Managed Payout Growth | -15.5% |
| Total Stock Market | -16.5% |
The Managed Payout funds suffer several problems, not the least of which is the promise of an income stream of 3%, 5% or 7% and preservation of capital, adjusted for inflation. Unable to earn the “income” required, Vanguard has been returning capital to shareholders to meet these obligations.
Having launched as the bear market was gaining momentum, the funds generated Maximum Cumulative Losses (MCLs) ranging from -42.4% for Managed Payout Growth to -35.5% for Managed Payout Distribution Focus before beginning to recover in early 2009. At year-end 2009, the Growth fund still needed an additional 18.3% gain to completely recover its loss, the Managed Payout Growth & Distribution fund required a 14.1% gain to recover its loss, and the Distribution Focus fund needed another 11.8% gain to recover its decline.
The Managed Payout funds’ design is similar in many ways to The Investment Fund for Foundations (TIFF) Multi-Asset Fund (MAF) (www.tiff.org), which seeks to exceed inflation by 5% per annum, and is supposed to reflect the best thinking of the TIFF investment committee running it. Unfortunately, since inception, none of the Managed Payout funds have been able to keep up with TIFF’s Multi-Asset Fund, as the graph shows. (Lines rise when the Managed Payout funds outperform and fall when they underperform.) I should note that Vanguard uses TIFF’s MAF as an investment option for large accounts in its Charitable Endowment program.
Also, TIFF’s MAF can invest more broadly than Vanguard’s funds, and it uses hedge funds or other private investment vehicles for some of its assets. It currently invests with two managers that also run actively managed funds at Vanguard — Marathon Asset Management and Wellington Management. But the bottom-line strategy remains similar — with a benchmark allocating assets to global stocks, high-yield bonds, commodities, REITs, inflation bonds and cash.
The Managed Payout funds’ asset allocation policies are determined by a committee whose members have never been identified. While Chief Investment Officer Gus Sauter and Quantitative Equity Group head Sandip Bhagat are presumably members of this committee, the full makeup has never been publicly announced. The lack of transparency certainly doesn’t help the funds’ causes.
At the end of 2009, the Managed Payout funds’ portfolio mixes included allocations to domestic stocks, through Total Stock Market, of just 25.9% to 37.3%. These represent allocations at, or within a few basis points of, their lowest levels since the funds’ inception. During the summer, the funds began investing more heavily in commodities and in REITs (REIT Index).Vanguard still has plans, at some point, to launch an absolute-return portfolio as a fund component.
| Growth | Growth & Dist. | Dist. Focus | |
|---|---|---|---|
| Total Stock Market | 37.3% | 31.7% | 25.9% |
| Total Bond Market II | 5.0% | 10.0% | 15.0% |
| Interm-Term Invest.-Gr. | 10.1% | 10.0% | 15.0% |
| European Index | 14.4% | 12.2% | 10.1% |
| Commodities | 9.6% | 9.5% | 9.1% |
| REIT Index | 4.9% | 5.0% | 5.1% |
| Market Neutral | 5.0% | 4.9% | 5.0% |
| Pacific Index | 7.1% | 6.1% | 5.0% |
| Inflation-Protected Sec. | 0.0% | 4.9% | 5.0% |
| Emerging Markets | 6.6% | 5.7% | 4.8% |
Declining distributions, a return of capital, uncertainty over when an additional strategy (absolute return) will be implemented, lack of management transparency and a general wariness of strategies that may be “too smart by half” are all working against the Managed Payout funds at Vanguard and may also be an issue for other purveyors of similar products. It will be many years before their success, or failure, is truly known, but the early returns aren’t impressive.
