Funds featuring managed payouts off to rocky start
Income-focused investments fall short of expectations amid downturn
By Sue Asci 1 February 2009
If timing is everything, the mutual fund industry couldn’t have picked a worse time to launch managed-payout funds.
The funds, which aim to give retirees a steady stream of income, arrived on the scene in late 2007. At the time, they were hailed as a turnkey retirement plan for investors needing regular income payouts, professional money management and relatively low fees.
Seeing an opportunity to keep investors in mutual funds long after they retire, Boston-based Fidelity Investments jumped headfirst into the managed-payout-fund arena, launching 11 funds in October 2007.
The Vanguard Group Inc. of Malvern, Pa., quickly followed suit in 2008 with three managed-payout funds of its own.
Other big companies that launched managed-payout funds include John Hancock Financial Services Inc. of Boston and The Charles Schwab Corp. of San Francisco.
Since then, the stock market has plunged to abysmal lows — forcing many managed-payout funds to reduce dramatically the amount of income they were able to disburse. Making matters worse, many funds have been forced to dip into their capital to meet those payouts — meaning investors are simply spending down what they spent decades accumulating.
“These funds are dogs,” said Robert Frey, founder of Professional Financial Management Inc. of Bozeman, Mont., which manages $50 million in assets. “Some of these funds are returning their own money to the investors. The chance of running out of money before you run out of time is very high.”
The nation’s 29 managed-payout funds held a mere $483 million in assets at the end of last year, according to Chicago-based Morningstar Inc.
“The plight of managed-payout funds dramatizes boldly what can happen to investors if they experience a serious market downturn early on, when they are starting to draw down their payments in retirement,” said Dan Culloton, a fund analyst at Morningstar.
Fund companies are taking steps to prevent managed-payout funds from depleting their assets.
Three weeks ago, Vanguard announced plans to lower the monthly payout on its funds by 16% to 18%.
That means an investor with $100,000 in the Managed Payout Growth Focus Fund (VPGFX) will see their monthly payout drop to $205.90 this year, from $249.88 in 2008.
The monthly payout for the Managed Payout Distribution Focus Fund (VPDFX) dropped to $491.25, from $583.21. And the Managed Payout Growth and Distribution Fund (VPGDX) dropped to $349.33, from $416.29.
At least 90% of those payouts are coming from the funds’ capital.
“Ideally, you’d like to see the payments come out of investment earnings,” said John Ameriks, a principal and head of the Investment Counseling and Research Department at Vanguard. “Over the course of the last year, there have been realized losses that were more than the amount of the investment income. In that situation, you will have a return of capital.”
“In poor markets, it will lower the payments,” Mr. Ameriks said. “Good markets will build them back up again.”
SPENDING DOWN
On the other hand, Fidelity’s managed-payout funds aim to spend down all the money held by investors in the funds over a predetermined amount of time.
The 14 funds offer investors a regular payment of earnings and principal that increases over time until the assets are depleted.
The dollar value of those payouts hinges on the assets held in the fund. So while the percentage of the payout is guaranteed to increase, the dollar amount is not.
For example, an investor who has $100,000 invested in the 2042 portfolio last year received a monthly payout of $396, or 4.75% of the fund’s net asset value. This year, the same investor will receive a monthly payout of $265, or 4.81%.
A similar investment in the 2016 portfolio would result in a 2009 payout of 13.52%, or $804, down from 12.20%, or $1,017, in 2008.
“You can have payout decline commensurate with your asset losses,” said Jonathan Shelon, co-portfolio manager of the Fidelity funds, which had $34.1 million in assets as of Dec. 31.
Not all firms have cut payments.
John Hancock maintained the payout rates of 4% and 6% on its two managed-payout funds despite a 23% loss last year. But the payout on the John Hancock Retirement Distribution Fund (JRRAX) included a 22.55% return of capital.
John Hancock’s quarterly payout rates are based on performance forecasts, said Andrew Arnott, senior vice president of product management and development.
“The worst case scenario would be a prolonged period of declining markets, and then the dividends would continue to ratchet down,” Mr. Arnott said.
Managed-payout funds at Schwab are designed to preserve investors’ principal. By the end of 2008, one of its three funds, the Schwab Monthly Income Fund — Maximum Payout (SWLRX) had an average yield of 4.86%, falling short of an expected range of 5% to 6%, said Patrick Waters, director of retirement investment products at Schwab.
The Schwab funds, which have $50 million in assets, do not guarantee their yields, he said.
“Theoretically you could have some months with no payout,” Mr. Waters said.
Not surprisingly, many advisers are wary of managed-payout funds.
“They are a cheap replacement for an adviser,” said Chuck Gibson, president of Financial Perspectives of Newark, Calif., which has $50 million in assets under management. “It will be interesting to see if these things survive.”
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Funds featuring managed payouts off to rocky start
Income-focused investments fall short of expectations amid downturn
By Sue Asci
1 February 2009
If timing is everything, the mutual fund industry couldn’t have picked a worse time to launch managed-payout funds.
The funds, which aim to give retirees a steady stream of income, arrived on the scene in late 2007. At the time, they were hailed as a turnkey retirement plan for investors needing regular income payouts, professional money management and relatively low fees.
Seeing an opportunity to keep investors in mutual funds long after they retire, Boston-based Fidelity Investments jumped headfirst into the managed-payout-fund arena, launching 11 funds in October 2007.
The Vanguard Group Inc. of Malvern, Pa., quickly followed suit in 2008 with three managed-payout funds of its own.
Other big companies that launched managed-payout funds include John Hancock Financial Services Inc. of Boston and The Charles Schwab Corp. of San Francisco.
Since then, the stock market has plunged to abysmal lows — forcing many managed-payout funds to reduce dramatically the amount of income they were able to disburse. Making matters worse, many funds have been forced to dip into their capital to meet those payouts — meaning investors are simply spending down what they spent decades accumulating.
“These funds are dogs,” said Robert Frey, founder of Professional Financial Management Inc. of Bozeman, Mont., which manages $50 million in assets. “Some of these funds are returning their own money to the investors. The chance of running out of money before you run out of time is very high.”
The nation’s 29 managed-payout funds held a mere $483 million in assets at the end of last year, according to Chicago-based Morningstar Inc.
“The plight of managed-payout funds dramatizes boldly what can happen to investors if they experience a serious market downturn early on, when they are starting to draw down their payments in retirement,” said Dan Culloton, a fund analyst at Morningstar.
Fund companies are taking steps to prevent managed-payout funds from depleting their assets.
Three weeks ago, Vanguard announced plans to lower the monthly payout on its funds by 16% to 18%.
That means an investor with $100,000 in the Managed Payout Growth Focus Fund (VPGFX) will see their monthly payout drop to $205.90 this year, from $249.88 in 2008.
The monthly payout for the Managed Payout Distribution Focus Fund (VPDFX) dropped to $491.25, from $583.21. And the Managed Payout Growth and Distribution Fund (VPGDX) dropped to $349.33, from $416.29.
At least 90% of those payouts are coming from the funds’ capital.
“Ideally, you’d like to see the payments come out of investment earnings,” said John Ameriks, a principal and head of the Investment Counseling and Research Department at Vanguard. “Over the course of the last year, there have been realized losses that were more than the amount of the investment income. In that situation, you will have a return of capital.”
“In poor markets, it will lower the payments,” Mr. Ameriks said. “Good markets will build them back up again.”
SPENDING DOWN
On the other hand, Fidelity’s managed-payout funds aim to spend down all the money held by investors in the funds over a predetermined amount of time.
The 14 funds offer investors a regular payment of earnings and principal that increases over time until the assets are depleted.
The dollar value of those payouts hinges on the assets held in the fund. So while the percentage of the payout is guaranteed to increase, the dollar amount is not.
For example, an investor who has $100,000 invested in the 2042 portfolio last year received a monthly payout of $396, or 4.75% of the fund’s net asset value. This year, the same investor will receive a monthly payout of $265, or 4.81%.
A similar investment in the 2016 portfolio would result in a 2009 payout of 13.52%, or $804, down from 12.20%, or $1,017, in 2008.
“You can have payout decline commensurate with your asset losses,” said Jonathan Shelon, co-portfolio manager of the Fidelity funds, which had $34.1 million in assets as of Dec. 31.
Not all firms have cut payments.
John Hancock maintained the payout rates of 4% and 6% on its two managed-payout funds despite a 23% loss last year. But the payout on the John Hancock Retirement Distribution Fund (JRRAX) included a 22.55% return of capital.
John Hancock’s quarterly payout rates are based on performance forecasts, said Andrew Arnott, senior vice president of product management and development.
“The worst case scenario would be a prolonged period of declining markets, and then the dividends would continue to ratchet down,” Mr. Arnott said.
Managed-payout funds at Schwab are designed to preserve investors’ principal. By the end of 2008, one of its three funds, the Schwab Monthly Income Fund — Maximum Payout (SWLRX) had an average yield of 4.86%, falling short of an expected range of 5% to 6%, said Patrick Waters, director of retirement investment products at Schwab.
The Schwab funds, which have $50 million in assets, do not guarantee their yields, he said.
“Theoretically you could have some months with no payout,” Mr. Waters said.
Not surprisingly, many advisers are wary of managed-payout funds.
“They are a cheap replacement for an adviser,” said Chuck Gibson, president of Financial Perspectives of Newark, Calif., which has $50 million in assets under management. “It will be interesting to see if these things survive.”
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