The Wall Street Journal reports that Vanguard's so-called managed payout funds, which promise a 7% of principle distribution per year to investors, are delivering mostly phantom income.
..just four months after Vanguard's funds launched, their performance reveals one very big problem with how such funds are structured: to meet their payout obligations, the funds are dipping into principal.
Seventy-seven percent of the payouts from Distribution Focus Fund this year will actually come from the fund's capital, and it's a similar story for Vanguard's other two managed payout funds. For Growth and Distribution Fund that figure is 71%, while 63% of distributions from Growth Focus Fund have been taken from capital.
'People are getting their money back as a distribution,' said Dan Wiener, editor of The Independent Adviser for Vanguard Investors. 'These aren't coming from dividends or interest from holdings, or even short-term capital gains. These funds just haven't been making money.'"
The problem of course is that during rough market conditions these funds simply don't perform well enough to keep making payments without eating into principle. Since these fund's monthly payouts are set based on expected long term returns of the fund,when underlying investment performance doesn't live up to the payout goals, you are dipping into principal to 'earn' your 7%. Investors who bought into these Vanguard funds thinking they would be getting a steady, predictable stream of income have so far achieved this goal, but at the expense of their actual investment declining in value along the way - much like taking out 7% a year from your own portfolio as it sinks with the market.
Next year we expect Vanguard to lower the distribution to be 7% of the new lower fund price (which means those who bought in at launch will no longer be receiving 7% on their original investment). The current artificial yield is actual around 7.8% to those buying today because the fund price has fallen but the payout is fixed for now.
Bottom line, the only true yields above 7% are in distressed or non investment grade debt. The real yield on Vanguard Managed Payout Growth Focus Fund Investor Shares (VPGFX) is around 2.5%. Anything else - even higher yield stocks and REITs - will require some sort of liquidation of assets to generate that yield - hopefully after a capital gain but lately that as not been the case.
We (of course) predicted this outcome ("It’s unlikely Vanguard can create a fund delivering big 7% payouts with principal preservation and stability.") before the fund was launched.
The Wall Street Journal reports that Vanguard's so-called managed payout funds, which promise a 7% of principle distribution per year to investors, are delivering mostly phantom income.
..just four months after Vanguard's funds launched, their performance reveals one very big problem with how such funds are structured: to meet their payout obligations, the funds are dipping into principal.
Seventy-seven percent of the payouts from Distribution Focus Fund this year will actually come from the fund's capital, and it's a similar story for Vanguard's other two managed payout funds. For Growth and Distribution Fund that figure is 71%, while 63% of distributions from Growth Focus Fund have been taken from capital.
'People are getting their money back as a distribution,' said Dan Wiener, editor of The Independent Adviser for Vanguard Investors. 'These aren't coming from dividends or interest from holdings, or even short-term capital gains. These funds just haven't been making money.'"
The problem of course is that during rough market conditions these funds simply don't perform well enough to keep making payments without eating into principle. Since these fund's monthly payouts are set based on expected long term returns of the fund,when underlying investment performance doesn't live up to the payout goals, you are dipping into principal to 'earn' your 7%. Investors who bought into these Vanguard funds thinking they would be getting a steady, predictable stream of income have so far achieved this goal, but at the expense of their actual investment declining in value along the way - much like taking out 7% a year from your own portfolio as it sinks with the market.
Next year we expect Vanguard to lower the distribution to be 7% of the new lower fund price (which means those who bought in at launch will no longer be receiving 7% on their original investment). The current artificial yield is actual around 7.8% to those buying today because the fund price has fallen but the payout is fixed for now.
Bottom line, the only true yields above 7% are in distressed or non investment grade debt. The real yield on Vanguard Managed Payout Growth Focus Fund Investor Shares (VPGFX) is around 2.5%. Anything else - even higher yield stocks and REITs - will require some sort of liquidation of assets to generate that yield - hopefully after a capital gain but lately that as not been the case.
We (of course) predicted this outcome ("It’s unlikely Vanguard can create a fund delivering big 7% payouts with principal preservation and stability.") before the fund was launched.
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