Vanguard to Diversify Managed Payout Offering with Liquid Alternative Investments

Feb 27, 2015, 10:04 ET from Vanguard

VALLEY FORGE, Pa., Feb. 27, 2015 /PRNewswire/ -- Vanguard plans to further diversify the $1.6 billion Vanguard Managed Payout Fund by adding a new offering, Vanguard Alternative Strategies Fund. The firm filed a registration statement for the new fund with the U.S. Securities and Exchange Commission this morning. It is expected to be available in the second quarter.

Introduced in 2008, the Managed Payout Fund is designed to provide retired investors with regular monthly payouts as a supplement to other sources of income. The fund's advisor seeks to adjust the fund's overall asset allocation over time with an emphasis on sustaining its monthly payouts, keeping pace with inflation, and preserving capital over the long term.     

The Managed Payout Fund invests predominantly in low-cost Vanguard index funds that offer broadly diversified exposure to the world's stock and bond markets. It invests smaller portions of its assets in global minimum volatility and market neutral strategies, as well as commodities.

Vanguard Managed Payout Fund: Allocation to underlying funds as of 01/31/2015

Fund

Percentage

Vanguard Total Stock Market Index Fund

24.5%

Vanguard Global Minimum Volatility Fund

20.5%

Vanguard Total International Stock Index Fund

15.0%

Vanguard Total Bond Market II Index Fund

13.1%

Vanguard Market Neutral Fund

9.9%

Vanguard Total International Bond Index Fund

7.2%

Vanguard Emerging Markets Stock Index Fund

4.9%

Commodities

4.9%

Total

100.0%

 

"We've planned for some time to broaden the investment strategies available to the Managed Payout Fund.  Adding the new fund as a component is expected to provide further diversification and reduce portfolio volatility as a result of the low correlations of these strategies to stock and bond returns," said Vanguard CEO Bill McNabb.

The Alternative Strategies Fund will offer Investor Shares with an estimated expense ratio of 1.10%, well below the alternative fund category average expense ratio of 2.05%.[1]  The Managed Payout Fund is expected to allocate 10% of its weighting to the new fund. As a result of the reallocation of assets among the underlying funds, the Managed Payout Fund's expense ratio is estimated to increase to 0.42%.

Vanguard Alternative Strategies Fund follows an actively managed approach and seeks to generate an absolute return by investing in a range of well-defined, diversified alternative strategies, which will be implemented using a combination of long and short positions in equities, forward foreign currency contracts, commodity and Treasury futures, swaps, and other investments. The fund will be registered under the Investment Company Act of 1940 and subject to the Act's investor protections regarding portfolio liquidity, payment of redemption proceeds, security valuation, transparency of fees, and portfolio holdings disclosures, among others.

The fund will be managed by Vanguard Quantitative Equity Group (QEG), Vanguard's internal active equity management arm that has been managing assets since 1991. QEG is Vanguard's largest active equity advisor in terms of number of mandates with 16 and the firm's fourth largest advisor in terms of assets with $21 billion under management. Some of the group's largest stand-alone fund mandates include Vanguard Strategic Equity Fund with $5.8 billion in current assets and Vanguard Strategic Small-Cap Equity Fund with $685 million in current assets. QEG also manages portions of Vanguard Equity Income Fund, Vanguard Growth and Income Fund, and Vanguard Morgan Growth Fund.  

Vanguard Alternative Strategies Fund will also be available to clients of Vanguard Institutional Advisory Services (VIAS). VIAS delivers strategic and portfolio construction and portfolio management services to defined benefit plans, endowments, and foundations.  The investment professionals in VIAS develop customized, low-cost portfolios that seek to be diversified, risk appropriate, and aligned with an organization's overall strategy.

About Vanguard

Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world's largest investment management companies. Vanguard manages nearly $3 trillion in U.S. mutual fund assets, including more than $434 billion in ETF assets. The firm offers nearly 160 funds to U.S. investors and more than 120 additional funds in non-U.S. markets. For more information, visit vanguard.com. 

For more information about Vanguard funds, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing. Please note that a preliminary prospectus is subject to change.

All investing is subject to risk, including the possible loss of the money you invest. The investment strategies to be utilized by Vanguard Alternative Strategies Fund are complex and an investment in the fund may involve greater risk than investing in a traditional portfolio of stocks, bonds, and cash. There is no guarantee that the performance of Vanguard Alternative Strategies Fund will have low correlation with the returns of traditional capital markets.

A registration statement relating to Vanguard Alternative Strategies Fund securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This communication shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of, these securities in any state in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

The Managed Payout Fund is not guaranteed to achieve its investment objectives and is subject to loss, and some of its distributions may be treated in part as a return of capital. The dollar amount of the fund's monthly cash distributions could go up or down substantially from one year to the next and over time. It is also possible for the fund to suffer substantial investment losses and simultaneously experience additional asset reductions as a result of its distributions to shareholders under its managed distribution policy. An investment in the fund could lose money over short, intermediate, or even long periods of time because the fund allocates its assets worldwide across different asset classes and investments with specific risk and return characteristics. Diversification does not necessarily ensure a profit or protect against a loss in a declining market. The fund is proportionately subject to the risks associated with its underlying funds, which may invest in stocks, bonds, cash, inflation-linked investments, commodity-linked investments, long/short market neutral investments, and leveraged absolute return investments.

Because Vanguard Managed Payout Fund invests a portion of its assets in the Global Minimum Volatility Fund, it is subject to currency hedging risk, which is the chance that currency hedging transactions may not perfectly offset the fund's foreign currency exposures and may eliminate any chance for a fund to benefit from favorable fluctuations in those currencies. The Global Minimum Volatility Fund will incur expenses to hedge its currency exposures.

Vanguard owns issued patents for its Managed Payout Fund under U.S. Patent Nos. 8,180,695 and 8,185,464.

Vanguard Marketing Corporation, Distributor.

© 2015 The Vanguard Group, Inc. All rights reserved.

[1] Source: Morningstar Direct, as of December 31, 2014. Comparison group consists of actively managed multi-alternative funds.

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