Morningstar Advisor - Fall 2008 - (Page 22)

Investment Briefs suddenly look like much longer-maturity, more interest-rate-sensitive investments. Jacobson says that investors should buy smart. “Mortgages now effectively boast the same quality as Treasuries, and they appear to be about as cheap as they’ve ever been,” he says. “But don’t buy them indiscriminately.” The best route, he says, might be through a trusted mutual fund manager. “A good manager can do a lot to mitigate interest-rate risk, while still capitalizing on the sector’s value.” mutual fund analyst at Morningstar and editor of the Vanguard Fund Family Report newsletter. (See “Mutual Funds Get in the Game” in the Spring 2008 issue of the magazine for more on these retirement-income funds.) Perhaps more alarming to investors who were counting on these funds to provide a stream of payments throughout their retirement, return of capital, not investment gains from income or capital appreciation, has comprised most of the funds’ monthly payments, Culloton says. “Return of capital has made up between 67% and 79% of the funds’ first five monthly distributions,” he says. “This means that, so far, fund shareholders have just gotten their money back.” That can impair investors’ future payments because it leaves less of their money in the fund to benefit from future compounding of capital gains and income. Culloton wonders how long shareholders will put up with just getting their principal handed back to them and whether the funds, which have about $300 million in assets among them, will succeed in their goal: creating regular income without exhausting investors’ capital. Vanguard maintains that the funds will weather the current storm and meet their objective over the long term. The family acknowledges, though, that if the markets do not recover this year, the funds will reduce their payments next year. The funds’ payments are determined by a formula based on the offerings’ returns over the previous three years. Culloton says that he doesn’t expect the fund’s investment committee to make any drastic course corrections to forestall lower payments next year. The payout funds, which invest in other Vanguard stock and bond funds, as well as commodities, base their asset allocations on the committee’s assessment of the long-term risk/reward profiles of the underlying asset classes. Vanguard Payout Funds Dip into Capital The market is giving Vanguard’s three new Managed Payout Funds quite a hazing. Since their inception in May through the end of September, each of the offerings, designed to invest like miniendowments, has lost between 14.2% and 17.4%, says Dan Culloton, a senior NS TIONS TIONS NS NS NS NS IMPLER SIMPLER SIM ER SIM ER SIM ER SIMPLER MPLER S SOLUT NS SOLUT ONS SOLUTION SOLUTIONS UTIONS UTI NS LUT NS SIM SIM SIM SIM R ER ER ER ER ER R OLU SOLUTI NS PLE SOLUTIONS PLE S UTIONS PLE S LUTIONS PLER S LUTIONS S PLER SOLUTIONS SIMPLER SOLUTIONS SIMPLER SOLU NS SOLUT NS SOLUT NS SOLUTI NS SOLUTIONS SOLUTIONS S UTIONS SIMPLE SIMPLE MPLE SIMPL SIMPLER PLER PLER OLUT NS SOLUT NS SOLUTI NS SOLUTIONS SOLUTIONS SOLUTIONS S TIONS SI PLER SOLUTIONS SIMPLER SOLUTIONS SIMP SIMPLER SOLUTIONS SIMPLER SOLUTIONS SIMPL SIMPLE OLU NS SIMPLER SOLUT ONS MPLE SIMPLE OLU NS SIMPLER SOLUT ONS MPLE SIMPLE OLU NS S ER S ONS MPL S MPLE OLU NS SIMPLER SOLUTIONS SIMPL S PLE OLU NS SIMPLER SOLUTIONS SIMP Our newest rider has simpler solutions built right in. Both the product prospectus and underlying fund prospectuses can be obtained by writing to Nationwide Life Insurance Company, P.O. Box 182021, Columbus, OH 43216-2021. L.inc cost is 0.75%. In New York, the beneﬁ ts and cost may vary. Spousal continuation is an additional cost. Available with certain Nationwide variable annuities. When evaluating the purchase of a variable annuity, your clients should be aware that variable annuities are long-term investment vehicles designed for retirement purposes and will ﬂ uctuate in value; annuities have limitations; and investing involves market risk, including possible loss of principal. The cost of an option may exceed the beneﬁ t paid under the option. Carefully consider the fund’s investment objectives, risks, charges and expenses. All guarantees and protections, where available, are subject to the claims-paying ability of Nationwide Life Insurance Company. And 22 Morningstar Advisor Fall 2008 M8655-1_16x4.5.indd 1 PUBLICATION: DO NOT PRINT DOTTED LIN

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Morningstar Advisor - Fall 2008 Contents New on MorningstarAdvisor.com Letter from the Editor Contributors Inbox Are You Preparing for Higher Taxes? State of Financials Oracles of Alabama Investment Briefs Managers’ Investment Secrets Revealed Conformity Becomes a Growing Concern at American Gimme Shelter Location, Location, Location Rooted in Buffett, Going for Growth Keeping Little Company Away from the Numbers Consumer Confidence What about Natural Gas? TIPS to Beat Back Inflation Investing in Hidden Assets Funds That Have an Edge Come Tax Time Mutual Fund Analyst Picks 50 Most Popular Equity ETFs Undervalued Stocks Most Popular Variable Annuities New at Morningstar One for You, 19 for Me

Morningstar Advisor - Fall 2008

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