According to Vanguard's portfolio information for Lifestrategy 60 Inc units, the sub-funds of which it's made up are entirely Acc units (with the exception of an inconsequential 0.0% in a distributing gilts ETF).

But somehow the fund manages to pay out a ~1.6% yield (paid annually).

How is this actually achieved? Is the portfolio information incorrect (there are actually more Inc units held?) or are Vanguard doing something like liquidating a proportion of assets to generate some yield every year? Something else?

Morningstar's data seems to confirm the same all-Acc units picture.

Curiously the Vanguard portfolio information for Lifestrategy 80 and Lifestrategy 100 Inc units shows a bit more of a mix of Acc and Inc types for the sub-funds, although I'm dubious the relatively small proportion of Inc types held is sufficient to generate the stated yields (1.8% and 2.0% respectively) in either case.

I've had a look over the LifeStrategy prospectus inspecting all the mentions of "yield", "income" and "dividends" and while there's plenty of mention of how they're handled there was nothing about where they come from.

  • To whom it might be interested, these Lifestrategy ETFs have just come out in these days on the European markets too, they can now be bought by European investors. Dec 13 '20 at 14:45

I contacted Vanguard UK about this. They responded:

In order to pay distributions the Portfolio Manager liquidates proportional units of the underlying funds. The reason accumulation share class funds are used is to prevent the need to reinvest dividends that are issued by the underlying funds throughout the year.

A follow up question to confirm that the amount paid out is equivalent to what would be paid out if the sub-funds were actually Inc units yielded a bit more detail:

When an underlying accumulation share class receives income from a holding it "accumulates" and is reinvested in that fund as you would expect.

For the LifeStrategy Income shareclass there must be an accountancy adjustment to enable that income to be distributed.

This is done by making a reduction from the capital line and an addition to the income line. Thereby effectively reversing the underlying accumulation.

The reason we use accumulating underlying holdings rather than income is because both income and accumulating fund of funds must have the same underlying.

It is operationally more efficient and better for you as a client for Vanguard to reverse accumulations than it is to reverse income distributions.

I am simultaneously unsurprised and pleased to learn than Vanguard have structured things to be as efficient as possible for their clients' benefit!

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