Skip to Content
Investing Specialists

Return to Sender: Vanguard Payout Funds Dip into Capital

How long can Vanguard's new Managed Payout Funds return capital to shareholders?

Mentioned: ,

The market is giving Vanguard's new Managed Payout Funds quite a hazing.

Since their inception in May through the end of July, each of the offerings, designed to invest like miniendowments, has lost between 6.2% and 7.8%. Perhaps more alarming to investors who were counting on these funds to provide a stream of payments throughout their retirement, return of capital, not investment gains from income or capital appreciation, has comprised most of the funds' monthly payments. Return of capital has made up between 63% and 77% of the funds' first four monthly distributions. This means that, so far, fund shareholders have, for the most part, just gotten their money back. That can impair investors' future payments because it leaves less of their money in the fund to benefit from future compounding of capital gains and income.

It is still very early days; I think that the funds remain intriguing and may prove themselves worthy tools in the future. But this is not an auspicious beginning. One wonders how long shareholders will put up with just getting their principal handed back to them and whether the funds, which have about $300 million in assets among them, will succeed in their stated goal: creating regular income without exhausting investors' capital.

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.