(PUB) Vanguard Advisor

MANAGED PAYOUT (the consolidated version of the three original Managed Payout funds) has been a moving target over the past 13 months. Its portfolio of funds has been added to and subtracted from. And the surviving fund’s objec- tives have been tweaked. The latest changes to the fund’s portfolio occurred in April. It’s enough to make your head spin. And maybe that’s one reason investors aren’t biting. Managed Payout has seen almost no new money flow into it. One has to ask the question: Are all these changes, which haven’t attracted new shareholders, really help- ing existing shareholders? The short answer is that it’s an improvement, but not enough to war- rant buying the fund. I just don’t see the value in it. Why? Well, let’s start by retracing the path we’ve traveled over the past year. As a reminder, the original three Managed Payout funds, introduced to some fanfare in May 2008, were mod- eled after college endowments with the aim of providing predictable income to shareholders while also growing or at least maintaining the level of invested capital. A committee at Vanguard, led by John Ameriks, who runs the firm’s active equity investing group, actively manages the allocation across a wide MANAGED PAYOUT A Year of Changes

added to Total International Stock . Both trades have benefited sharehold- ers. Since the end of May 2013, foreign bonds have outpaced domestic bonds 3.6% to 2.3%, and REIT Index has only gained 9.7% to Total International Stock’s 15.7% gain. In December 2013, yet another new- comer to the Vanguard stable, Global Minimum Volatility , was added to the Managed Payout mix. The position was established by selling down holdings in Total Stock Market , Total International Stock and commodities. Since incep- tion, Global Minimum Volatility has returned 8.7% to Total Stock Market’s 8.8% gain and Total International’s gain of 8.5%—but it is far too soon to call this trade a success or a failure. Also, last December, REIT Index was removed from the portfolio, and the proceeds were added to Total International Bond. So far this move has not benefited shareholders, as REIT Index is up 16.3% this year, well ahead of Total International Bond’s 3.7% gain. The merger of the three Managed Payout funds into one occurred in January 2014. There was essentially no change from the old Managed Payout Growth &Distribution fund to the “new” Managed Payout fund—same alloca- tions, but a lower distribution hurdle.

range of assets from stocks and bonds to commodities and real estate. The most dramatic change over the past year was the merger of the three original Managed Payout funds, which each targeted different distribution and growth levels, into a single offering. The new fund, which is the old Managed Payout Growth & Distribution fund, seeks to make predictable monthly dis- tributions while having those distribu- tions and the invested capital grow with inflation. The fund targets a 4% annual distribution rate—down from a 5% tar- get before the merger. While the merger clearly has been the most far-reaching change to the Managed Payout suite, there have been a number of other changes to the portfolio over the past year. The table below tracks the allocation of the old Managed Payout Growth & Distribution fund and the new Managed Payout fund since April 2013. For the most part, the changes Ameriks and company have made have been to shareholders’ benefit, but the most recent trade has me scratching my head. Let’s start one year ago, in May 2013, when Total International Bond was introduced to the mix by trimming the position in Total Bond Market . At the same time, exposure to REIT Index was cut in half and the proceeds were

Moving Target Managed Payout* Total Stock Market Total International Stock Global Minimum Volatility Emerging Markets Stock

Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 39.8% 40.0% 39.7% 39.9% 39.6% 39.6% 39.6% 39.4% 25.1% 24.7% 25.0% 24.6% 25.0% 17.2% 21.9% 22.2% 22.1% 22.1% 22.1% 22.1% 21.9% 20.0% 19.6% 19.9% 20.3% 15.1% — — — — — — — — 20.0% 20.3% 20.4% 20.4% 20.3% — — — — — — — — — — — — 4.8% 57.0% 61.9% 61.9% 62.0% 61.7% 61.7% 61.7% 61.3% 65.1% 64.6% 65.3% 65.3% 65.2%

Stocks Sub-Total

Total Bond Market/TB Market II 10.0% 7.1% 7.1% 7.0% 7.0% 7.0% 7.0% 7.0% 8.1% 7.8% 7.8% 7.8% 12.9% Intermediate-Term Investment-Grade 5.1% 5.1% 5.1% 5.0% 5.2% 5.2% 5.2% 5.0% 5.0% 4.9% 4.9% 4.8% — Total International Bond — 3.0% 3.0% 3.0% 2.9% 2.9% 2.9% 2.9% 6.9% 7.4% 7.1% 7.1% 7.0% Bonds Sub-Total 15.1% 15.2% 15.2% 15.0% 15.1% 15.1% 15.1% 14.9% 20.0% 20.1% 19.8% 19.7% 19.9% Market Neutral 9.9% 10.1% 10.1% 10.1% 10.2% 10.2% 10.2% 10.1% 9.9% 10.2% 9.9% 10.0% 9.9% Commodities 7.8% 7.9% 7.8% 7.9% 7.9% 7.9% 7.9% 8.8% 5.0% 5.1% 5.0% 5.0% 5.0% REIT Index 10.2% 4.9% 5.0% 5.0% 5.1% 5.1% 5.1% 4.9% — — — — — Other Sub-Total 27.9% 22.9% 22.9% 23.0% 23.2% 23.2% 23.2% 23.8% 14.9% 15.3% 14.9% 15.0% 14.9% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% *Managed Payout Growth & Distribution became Managed Payout in January 2014.

4 • Fund Family Shareholder Association

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