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Vanguard to diversify managed payout offering with liquid alternative investments

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Vanguard plans to further diversify the USD1.6 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. 

“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,” says 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%. 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 USD21 billion under management. Some of the group’s largest stand-alone fund mandates include Vanguard Strategic Equity Fund with USD5.8 billion in current assets and Vanguard Strategic Small-Cap Equity Fund with USD685 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 customised, low-cost portfolios that seek to be diversified, risk appropriate, and aligned with an organisation’s overall strategy. 

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