American Funds pushes back against indexing

[JavaGuy]

American funds has a section on their website dedicated to espousing the virtues of active management.

Recent articles on their site suggest that there is value added by active managers if you limit the active fund universe to those that have low fees and high manager ownership. See:
https://www.americanfunds.com/advisor/insights/active-management.html

It is well understood that high fees in general hurt performance. The second criteria of high manager ownership makes some intuitive sense but it also strikes me that it could be cherry picking the data for some criteria that supports buying actively managed funds.


Naturally I'm a little wary of the analysis given the inherent conflicts, but I was wondering if anyone had taken a look at their information on the topic for any clear problems with the methodology. Are there other independent reports that support a similar conclusion?

[pulmdoc]

I took a look at the web page. I think the key "mistake" (I doubt was unintentional given the clear conflict of interest) is that when they claim their funds beat the indexes all the time, THEIR FEES ARE NOT INCLUDED AS AN EXPENSE AGAINST THE RETURN. This, of course, is a straw man argument.

[JavaGuy]

In my case I have some class A shares with American funds from earlier in my investing journey. I regret paying loads on the way in, but now that I'm in, I'm trying to determine if I should stick with them or move these funds into an indexed approach. If they indeed are likely to provide value over the next few decades, I would stay (but am not inclined to add new funds)


They do seem to exclude initial loads from performance which of course inflates their performance. Best I can tell, they do deduct the annual expense ratio from results.

The results on page 8 and 9 of https://www.americanfunds.com/advisor/pdf/shareholder/mfcpwp-028_capidea913.pdf seem pretty compelling for folks like me who already have paid the loads (but unfortunately don't show the full impact of the load on new money performance)

I'm looking for signs of improper methodology that would unfairly bolster their claim that they add value over the long haul. The only thing I see so far is the exclusion of the load from results. I also wonder if they might be playing games with the comparison index they chose.

Has anyone else moved money away from American Funds? What motivated you to make the final decision?

[The White Coat Investor]

I agree that if you're going to try to pick an active fund, you should focus on things like low costs, low turnover, concentration of best ideas, and high manager ownership.

I also think avoiding load funds is important.

But really, I don't see a reason to try to find an active fund likely to beat an index fund when it is so darn easy to beat 80-90% of investors guaranteed by just buying the index fund. Why run manager risk at all? I'd rather invest my time actively and my money passively. I maxed out two Roth IRAs, two individual 401(k)s, an HSA and four 529s up to the state tax credit limit this month. Why would spending my time combing through and monitoring actively managed mutual funds to try to find one that might beat its corresponding index fund 0.5% be a better idea than spending my time doing something I'm good at that pays better or at least something I enjoy more? I really haven't found a reason in 12 years as a DIY investor.

This is just American Funds trying to slow the rapid flow of investors from their funds to Vanguard.

[Hatton]

I have some American Funds in a taxable account.  These funds were bought way back in the 90s and have big capital gains. Since I don't want to pay the taxes I just keep them.  I would not buy them now and do not reinvest in them.  When they distribute money I reinvest it in Vanguard funds.

[WallStreetPhysician]

JavaGuy wrote:

American funds has a section on their website dedicated to espousing the virtues of active management.

Recent articles on their site suggest that there is value added by active managers if you limit the active fund universe to those that have low fees and high manager ownership. See:
https://www.americanfunds.com/advisor/insights/active-management.html

It is well understood that high fees in general hurt performance. The second criteria of high manager ownership makes some intuitive sense but it also strikes me that it could be cherry picking the data for some criteria that supports buying actively managed funds.

Naturally I’m a little wary of the analysis given the inherent conflicts, but I was wondering if anyone had taken a look at their information on the topic for any clear problems with the methodology. Are there other independent reports that support a similar conclusion?

Click to expand...

I'm concerned that on their active scorecard, they only use 20 years of data (1996-2016).  Surely, American Funds (founded 1931) has more data on their funds' performance than just the past 20 years.

[VagabondMD]

WallStreetPhysician wrote:

JavaGuy wrote:

American funds has a section on their website dedicated to espousing the virtues of active management.

Recent articles on their site suggest that there is value added by active managers if you limit the active fund universe to those that have low fees and high manager ownership. See:
https://www.americanfunds.com/advisor/insights/active-management.html

It is well understood that high fees in general hurt performance. The second criteria of high manager ownership makes some intuitive sense but it also strikes me that it could be cherry picking the data for some criteria that supports buying actively managed funds.

Naturally I’m a little wary of the analysis given the inherent conflicts, but I was wondering if anyone had taken a look at their information on the topic for any clear problems with the methodology. Are there other independent reports that support a similar conclusion?

Click to expand…

I’m concerned that on their active scorecard, they only use 20 years of data (1996-2016).  Surely, American Funds (founded 1931) has more data on their funds’ performance than just the past 20 years.

Click to expand...

That would be the least of my concerns.

[WallStreetPhysician]

Vagabond MD wrote:

WallStreetPhysician wrote:

JavaGuy wrote:

American funds has a section on their website dedicated to espousing the virtues of active management.

Recent articles on their site suggest that there is value added by active managers if you limit the active fund universe to those that have low fees and high manager ownership. See:
https://www.americanfunds.com/advisor/insights/active-management.html

It is well understood that high fees in general hurt performance. The second criteria of high manager ownership makes some intuitive sense but it also strikes me that it could be cherry picking the data for some criteria that supports buying actively managed funds.

Naturally I’m a little wary of the analysis given the inherent conflicts, but I was wondering if anyone had taken a look at their information on the topic for any clear problems with the methodology. Are there other independent reports that support a similar conclusion?

Click to expand…

I’m concerned that on their active scorecard, they only use 20 years of data (1996-2016).  Surely, American Funds (founded 1931) has more data on their funds’ performance than just the past 20 years.

Click to expand…

That would be the least of my concerns.

Click to expand...

Agreed, just pointing out the obvious abnormality in the methodology.