March 8th, 2010.

Pay Attention to the Men behind the Curtain at Vanguard

Family lifts the veil on its Managed Payout Funds' investment committee.PrintReprintsCommentRecommend (1)By Dan Culloton | 03-07-10 | 06:00 AM | E-mail Article 

Vanguard has revealed the men behind the curtain of its Managed Payout Funds.

Since it launched its three endowmentlike funds in 2008, the fund family has kept to itself the names of the members of the investment committee that sets and tweaks the asset allocations for the portfolios. That opacity is one of the reasons why it has been hard to recommend these offerings, which are designed to use sophisticated, institutional-grade portfolio-management strategies to make investors' nest eggs last forever, while supporting monthly payments of 3% to 7% of the funds' three-year trailing average net asset values. Think David Swensen's Yale Model for the masses.

About the AuthorDan Culloton is an associate director of fund analysis for Morningstar and editor of Morningstar's Vanguard Fund Family Report, a monthly newsletter that offers independent, no-holds-barred guidance on the pros and cons of this dominant fund family.Contact Author | Meet other investing specialists

The other reasons have included the uninspiring showing of the funds, which are Vanguard's first attempt at endowment-style investing for retail investors.  Vanguard Managed Payout Growth Focus (VPGFX

VPGFX),  Vanguard Managed Payout Growth & Distribution (VPGDX

VPGDX), and  Vanguard Managed Payout Distribution Focus (VPDFX

VPDFX)  have lost between 5% and 8% annualized from their May 2008 inception through early March 2010, more than most other payout funds that have been launched in recent years, such as Fidelity's Income Replacement funds and Schwab's Monthly Income funds. From June 2008 to June 2009, Vanguard's Managed Payout Funds also shed more than the typical college and university endowment, which dropped 18.7%, according to a survey of 842 institutions by the National Association of College and University Business Officers and educational institution investment firm Commonfund. The funds fell between 21% and 27% in that time.

The Vanguard Managed Payout Funds' poor performance since inception has forced the funds to reduce the dollar amount of their payments in each of the past two years. They've also had to return capital to fundowners because there haven't been enough capital gains and income to cover distributions. Adding to the uncertainty is the fact that the family is toying with the idea of adding an internally managed hedge fund to the Managed Payout Funds' arsenal. And Vanguard's experience, so far, with alternative investment approaches like these funds and the  Vanguard Market Neutral (VMNFX

VMNFX) hasn't exactly impressed. At least the family has made the Managed Payout Funds' management more transparent. Vanguard has long said its CIO and indexing and quantitative investing expert Gus Sauter would lead the investment committee setting the funds' course, and  Vanguard 500 (VFINX

VFINX) manager Michael Buek would implement the panel's recommendations. Until now Vanguard left it at that and kept the rest of the committee a secret. Soon, however, the firm will disclose in its prospectuses that its chief economist Joseph Davis, investment counseling and research group chief John Ameriks, and portfolio review department head Chris McIsaac make up the balance of the committee.

It's curious that some of Vanguard's other talent, such as fixed-income group head Robert Auwaerter or the family's head of active quant investing, Joel Dickson, aren't on the committee. But the roster raises no red flags. Unlike Sauter, none of the other committee members have public fund management records. They've all been with Vanguard for years, though, and have experience thinking about portfolios. Davis and Ameriks have Ph.D.s and have led the firm's research, respectively, into economic forecasting and retirement planning and investing, as well as investor behavior. McIsaac oversees Vanguard's group of analysts that selects and monitors the subadvisors of many of Vanguard's actively managed funds.

Unveiling the composition of the Managed Payout Funds' brain trust clears some of the fog around these funds' future, but not all of it. They still have to prove they can meet their objectives over the long term.