More mutual funds are being developed that offer managed payouts designed to give investors a steady stream of income.
More mutual funds are being developed that offer managed payouts designed to give investors a steady stream of income.
None of the funds being developed, however, look quite the same.
It will be a challenge for in-vestors, said Dan Culloton, an analyst for Morningstar Inc. of Chicago.
"There's going to be a lot of different permutations of these," he said. "It's important for investors to be discriminating."
In some cases, the differences are subtle. For example, John Hancock Financial Services Inc. of Boston filed with the Securities and Exchange Commission on Oct. 12 to offer two funds of funds with managed-payout features: the John Hancock Retirement Income Portfolio and the John Hancock Retirement Rising Income Portfolio.
On the surface, they look similar to three funds of funds with managed-payout features for which The Vanguard Group Inc. of Malvern, Pa., filed Sept. 27.
But there are important differences. The proposed John Hancock funds will be able to invest in funds offered by a variety of companies from Pacific Investment Management Co. LLC in Newport Beach, Calif., to Franklin Advisers Inc., a unit of San Mateo, Calif.-based Franklin Resources Inc.
The Vanguard funds will invest only in other Vanguard funds.
While that could put Vanguard at a disadvantage — a fund of funds that is not limited to a single fund complex is generally considered a better investment — that's not necessarily the case, Mr. Culloton said.
Vanguard's managed-payout funds will feature an estimated expense ratio of 0.34%, compared with total fund expenses of 1.45% for the Class A shares of the John Hancock funds.
Of course, when looking at managed-payout funds, it's not just about total expenses.
Fidelity Investments of Boston on Oct. 3 launched 11 target date funds with managed-payout options, the most expensive of which has an expense ratio of 0.65%. But its funds are very different from those proposed by Vanguard and John Hancock.
Fidelity makes it clear that if the investor chooses the managed-payout feature, its new funds will use principal to make payouts. In fact, the funds liquidate when they reach a set date.
Both the Vanguard and John Hancock funds will attempt to preserve principal. Pro-spectuses for managed-payout funds from both companies, however, state that principal can be used to make payments.
Despite the obvious differences among all the funds, it's unclear whose approach will be the most attractive to investors.
It may end up that they are equally attractive to different in-vestors, said Burton Greenwald, president of Philadelphia-based B.J. Greenwald Associates.
"I think they will appeal to two distinct market groups," he said.
Those investors seeking the most income available will probably gravitate to the Fidelity funds, Mr. Greenwald said. Because they explicitly return principal, they will have higher payouts, he said.
More-conservative income seekers, however, will probably favor the more "incremental" approach both Vanguard and John Hancock hope to offer, Mr. Greenwald said. "I don't think one or the other will be the gold standard," he said, referring to the different approaches.
At least one market watcher, however, believes that Vanguard has an advantage.
Depending on the Vanguard fund, investors can expect 3%, 5% or 7% annual distribution, according to the funds' prospectus.
If Vanguard can do that without eating away too much shareholder principal, that's very attractive, said Howard Schneider, president of Practical Perspectives, an industry consulting firm in Boxford, Mass.
The prospectus did not make clear how much the John Hancock funds would distribute. It said only that the John Hancock Retirement Income Portfolio seeks to provide a quarterly distribution of a percentage of the fund's net asset value.
The John Hancock Retirement Rising Income Portfolio seeks to provide the same, except that the distribution rate will be increased annually by the rate of inflation as measured by the average annual change in the consumer price index.
The Fidelity funds work a little differently.
To receive a managed payout from Fidelity's target date funds — called Fidelity Income Replacement Funds — an investor would also have to sign up for the companion Smart Payment Program. It uses quantitative analysis to determine a schedule of annual target payment rates designed to enable investors to receive regular withdrawals from a fund.
The withdrawals have the potential to keep pace with inflation over a defined period of time, provided that the fund's investment strategy works as intended.
David Hoffman can be reached at dhoffman@crain.com.
