Critique this graph from American Funds

[Live Free MD]

I ran across this page from American Funds, suggesting that their Growth Fund of America (an actively managed fund) has significantly outpaced the Vanguard 500 index fund since 1976, even after accounting for expenses.

https://www.americanfunds.com/individual/insights/investment-insights/five-american-funds-that-beat-the-first-index-funds-lifetime-results.html?cid=sm_fb_10224

Interestingly, however, the Growth Fund of America has underperformed the Vanguard 500 index over the last 10 years, after accounting for expenses (see the table underneath the graph).

Does their graph covering the time interval from 1976 to present simply represent selection bias?  In other words, did they simply select a time period where the Growth Fund of America was retrospectively shown to outperform the Vanguard 500 index?  Or is the Growth Fund of America truly a superior fund? (skeptical).

[ENT Doc]

A few thoughts:

1.  Some funds will indeed beat an index approach even when looking at long time periods.

2.  Those funds have a survivorship bias.

3.  Their future results may not be so rosy.  If we are to take this information at face value, the only people who benefited were the original investors, as they had a larger nest egg to go through the tremendous growth of the last 10 years.  The person investing later clearly would have been better served investing with Vanguard.  Their advertisement is not logical.  They are using old performance (in the earlier years of the comparison) to justify why you should go with them now when in fact the most current data shows that they are worse than the index.

4.  They addressed the purchase fee, but did they incorporate the expense ratio?  Doesn't look like it since they don't say it explicitly. This undercuts the entire graph and worsens the argument that one should invest with them now.

5.  Average annual returns are meaningless.  What matters for comparison is the geometric return.  Given their funds volatility compared to the Vanguard fund their returns may be worse than shown over the past 10 years.

Could they have beaten the S&P over this horizon?  Sure.  But given the fact that we don't have a time machine or accurate numbers from them I'll keep my money with Vanguard index funds.

[VagabondMD]

This article has been discussed and debated quite a bit since it was published earlier this year. In the past, I have owned American Funds and found that they were generally high performers among the active managed funds and competitive with the index funds over the years. In the past, they also came with a hefty sales charge and were often sold by unsavory salespeople, too. In the past, the ER of VFINX was higher, too.

That said, past is past. The two big questions one needs to ask one's self looking at the graph (IMO) are:

1. Was it luck or skill that allowed the Growth Fund of America to outpace the Vanguard S&P 500 fund?

2. If it is skill, will the skill continue to outpace? Or, as Clint Eastwood/Dirty Harry might ask, "Do you feel lucky?"

[The White Coat Investor]

I doubt there is anything about the graph to critique, just be careful what conclusions you draw from it as noted above.

[Hatton]

Full disclosure.  Growth Fund of America was the first mutual fund that I purchased.  Throughout the 90s it was always in the top 10 performers. It became so big that it is no longer nimble.  It is a closet indexer.  I still own it but no longer reinvest any dividends or capital gains.  I would not buy it now but I don't hate it enough to take a capital gains hit in my taxable account.

[Gas_Doc]

Here's my critique:

Annualized 10-year return after load and expense ratio:
- AMRMX: 5.49%
- AMCPX: 6.30%
- AGTHX: 5.64%
- AIVSX: 5.17%
- AWSHX: 5.29%
- VFIAX: 6.78% with far lower turnover (even better for taxable account)

 

The End