Vanguard announced last week that it was merging several of its mutual funds in order to simplify its fund offerings. According to Morningstar’s Josh Charlson though, this may in fact be a move to obscure the relatively poor performance of some of these funds over the past 10 years. For example, the Vanguard Growth Equity offering which ranks in the bottom quintile of the large growth category, is being merged with the Vanguard U.S. Growth fund, a fund with better performance and over eight times Vanguard Growth Equity’s AUM.
Vanguard is also moving to combine several of its Managed Payout Funds: the Distribution Focus Fund, Growth and Distribution Fund, and the Growth and Distribution Fund. While these funds haven’t necessarily performed poorly, AUMs have remained relatively small (all sub $1 billion). The merged fund will be renamed Vanguard Managed Payout, have ~$1.4 billion AUM, and a lowered target distribution rate, which Vanguard believes will be a more attainable long-term goal that matches a reasonable drawdown rate for most retirees. This will be disappointing to investors who were previously in the Distribution Focus Fund (7% payout rate), but gives the fund a better chance to actually meet its targets. Another issue for Managed Payout funds is that although merging funds may make it easier for investors to select a Managed Payout fund, understanding the investment vehicle itself hasn’t gotten any easier. The payout formula is not easy to understand, and the resulting variable payout rates may have created a mismatch between investors’ perception that the stated payout percentage referred to a stable income rate.
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