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Fund Spy: Morningstar Medalist Edition

Vanguard Managed Payout Funds Face Up to Challenges

Will the merger of these offerings help save the firm's managed-payout concept?

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Last week's announcement that Vanguard was "simplifying" its lineup by merging a number of mutual funds may have obscured the fact that, as fund companies have done since time immemorial, Vanguard is also attempting to paper over a few of its mistakes. For instance, unrated Vanguard Growth Equity (VGEQX), a subadvised offering that ranks in the bottom quintile of the large-growth category over the past 10 years, has never really found its footing. It's being merged into another subadvised strategy,  Vanguard U.S. Growth (VWUSX).

"Mistake" is too strong a word to describe the fate of Vanguard's Bronze-rated Managed Payout Funds, which are being merged from three distinct strategies into one. But certainly "success" is not an apt description either. Launched in 2008, the funds attempt to use a total-return strategy to generate a relatively dependable distribution stream for retirees as part of their retirement-income portfolios, each with a different level of targeted payout. By Vanguard's standards, the funds have remained tiny. Under the merger plan, the largest and smallest funds--the $800 million  Distribution Focus Fund (VPDFX) and the $110 million  Growth Focus Fund (VPGFX)--will merge into the $531 million  Growth and Distribution Fund (VPGDX), which also has the most moderate asset allocation and distribution target of the three. As part of the change, the remaining fund will be renamed Vanguard Managed Payout, and its target distribution rate will be lowered to 4% from 5%, which Vanguard believes will be a more attainable long-term goal that matches a reasonable drawdown rate for most retirees.

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