Am Funds Ad. Better than index(?).

[gcgang]

https://www.americanfunds.com/indiv...-first-index-funds-lifetime-results.html.html

Above Ad by Capital Group (American Funds) claims the five stock funds they had in existence when S&P500 Index started outperformed significantly.

I know from what I read here that this is highly unlikely, although as an AmFd investor I'm happy to see this claim.

I'm looking forward to learning from the investors here "what's the catch".

Summary of claim (very short video): from 8/31/76-12/31/17 a Blend of 5 funds beat the index by growing $10,000 to $1.4mm vs $780k, $620,000 or about 80% more. Funds used and their returns are listed.

Table in Ad shows last 10 years performance. The Blend is slightly less return than S&P but with slightly less Standard Deviation.

Thanks in advance for your input.

 

[copyright1997reloaded]

Step 1. Create n funds with different strategies.
Step 2. Manage them.
Step 3. Advertise the ones that do better than s&p 500.
Done.

Or am I just cynical?

 

[growing_older]

Looks like they had some go-go years at some point. Vanguard Index beats the blend, and beats all except AMCAP, for the last 10 years, even more so if you consider expenses. Would take more detailed analysis to see when and why which funds had some good years and how much that is reflected in these figures for the longer aggregated time period. Does anyone know if there is any survivorship bias with other American funds that may have been discontinued in favor of the best performing ones?

 

[gcgang]

I'm pretty sure they've not done the incubator funds. Also pretty sure they've never folded a fund. They said those were the only stock funds they had in 1976.

As for expenses, those numbers are net of expenses, and even deducts 5.75% from the initial Am Fd purchase.

They list the five fund performance. As I recall, the best grew to $2.2, the worst was $900k. Still better than VFINX.

 

[NW-Bound]

Looks like they had some go-go years at some point...

Yes. If you bought in 2008, you would be roughly in line with the S&P up to this point. The outperformance was from earlier years.

 

[njhowie]

It is well-documented that American Funds has a long history of outperformance among all mutual funds.

 

[samclem]

It is well-documented that American Funds has a long history of outperformance among all mutual funds.

It is well documented that, in 1976 (start of the period shown in their illustration) real investors would have paid a front-end load of more than 5% to buy American funds, while there was no load to buy the Vanguard 500 index. For whatever reason, the impact of that load isn't shown in their comparison.

The S&P 500 is one index with one set of assets (large US companies). An accurate and useful comparison would have been to compare each of these American funds against an appropriate index (US bonds, large US value stocks, etc). If we want to see how these American funds worked together as a portfolio (is there anything to show that an equally weighted portfolio of these 5 funds was recommended by American at the time?), then compare it to a portfolio of index funds with similar asset types. And include different starting and ending dates so we can see how sensitive the results are to that.

And, include the impact of the loads and fees.

Cherrypicked backtesing.

 

[gcgang]

It is well documented that, in 1976 (start of the period shown in their illustration) real investors would have paid a front-end load of more than 5% to buy American funds, while there was no load to buy the Vanguard 500 index. For whatever reason, the impact of that load isn't shown in their comparison.

The S&P 500 is one index with one set of assets (large US companies). An accurate and useful comparison would have been to compare each of these American funds against an appropriate index (US bonds, large US value stocks, etc). If we want to see how these American funds worked together as a portfolio (is there anything to show that an equally weighted portfolio of these 5 funds was recommended by American at the time?), then compare it to a portfolio of index funds with similar asset types. And include different starting and ending dates so we can see how sensitive the results are to that.

And, include the impact of the loads and fees.

Cherrypicked backtesing.

Very enlightening reply, samclem. Thanks.

 

[TimeMeasure]

In addition to the other good points (about expense ratios, front-end loads, statistical cherry-picking, etc.), one other consideration:

If I remember correctly, looking at yearly capital gain distributions from some of the American funds recently, those distributions seemed fairly high.

Please point out if this logic is “off,” but:

To do an “apples to apples” comparison of an actively managed fund against a tax-managed fund, or even against an index fund (which presumably would tend to have lower turnover than an actively managed fund), one would have to factor in the tax impact of capital gain distributions.

Have never seen an actual analysis on this, but have long suspected that turnover ratios (as a proxy for capital gain distributions) would be, like expense ratios, enough to tip the balance for “real” returns in favor of index or tax-managed funds, even if some actively managed funds have higher “nominal” returns on paper.

 

[MRG]

it is well documented that, in 1976 (start of the period shown in their illustration) real investors would have paid a front-end load of more than 5% to buy american funds, while there was no load to buy the vanguard 500 index. For whatever Reason, the impact of that load isn't shown in their comparison.

The s&p 500 is one index with one set of assets (large us companies). An accurate and useful comparison would have been to compare each of these american funds against an appropriate index (us bonds, large us value stocks, etc). If we want to see how these american funds worked together as a portfolio (is there anything to show that an equally weighted portfolio of these 5 funds was recommended by american at the time?), then compare it to a portfolio of index funds with similar asset types. And include different starting and ending dates so we can see how sensitive the results are to that.

And, include the impact of the loads and fees.

Cherrypicked backtesing.

We shouldn't forget who owns what. American Funds is owned by The Capital Group, a private for profit company.

 

[Chuckanut]

It seems to me that they cherry-picked 5 funds, blended them together and then claimed to beat the index.

My question is this: Would you as an investor back in 1976 have picked those five funds and just those give funds way back then? And then, would you have held on to them until 2017? What are the odds?

When I get my Time Machine fixed - the necessary part won't be available for a number of decades as it hasn't been invented yet - perhaps we can take a ride back and change our 1976 investments. Until then, all I can say is hindsight is 20/20.

 

[harley]

I don't think (or I hope not) that anyone has ever claimed that over a long period of time there wouldn't be any funds that beat their appropriate index. The problem is identifying them ahead of time. And then being sure that they'll continue to outperform in the future.

Index investing is for those whose plan includes finding an investment that allows them to fulfill a particular goal. In most of our cases, ER. I have discussions with a friend and fellow forum member often about the end game. It's hard to not want to find "the winner". But if you accomplish what you set out to do, you won! It doesn't matter if someone else won bigger, unless you are so competitive that you can't sleep at night unless you are on top.

Personally I think American Funds are a decent investment, and anyone would probably do just fine investing in their offerings. But I prefer taking the short cut of earning the market return minus as small a cost as possible. It's good enough.

 

[pb4uski]

True according to Portfolio Visualizer...but Portfolio Visualizer "only" goes back to 1985 and I'm not sure what proportions that they used (I split evenly).

https://www.portfoliovisualizer.com...location5_2=20&symbol6=AMRMX&allocation6_2=20

But a fair question might be what have you done for me lately... VFIAX wins for last 10 years.... by 27 bp.... and 5 years... by 78 bp.

https://www.portfoliovisualizer.com...location5_2=20&symbol6=AMRMX&allocation6_2=20

https://www.portfoliovisualizer.com...location5_2=20&symbol6=AMRMX&allocation6_2=20

 

[MRG]

You can only buy American Funds through an advisor. Their 1% AUM isn't included in the comparison?

 

[OldShooter]

Backtesting is simply an implementation of Will Rogers' advice on the stock market: "If it doesn't go up, don't buy it."

By cherry picking time periods and cherry picking benchmarks, almost any huckster with an advertising budget can make his fund look like God's gift to investors.

The other thing, as has been pointed out, is that there are always funds that outperform their benchmarks during any specific period. IOW, there are always monkeys whose dart-throwing produces a good score.

The S&P SPIVA reports, however, show that the longer the time period, the fewer monkeys will excel. It's down to a few percent looking over 10 years. S&P Manager Persistence reports show that it is impossible to pick the lucky monkeys ahead of time. Ken French also discusses these facts in two videos: https://famafrench.dimensional.com/videos/is-this-a-good-time-for-active-investing.aspx and https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

So the monkeys at American get lucky once in a while? Please wake me when there is something unusual in the news.

 

[gcgang]

Backtesting is simply an implementation of Will Rogers' advice on the stock market: "If it doesn't go up, don't buy it."

By cherry picking time periods and cherry picking benchmarks, almost any huckster with an advertising budget can make his fund look like God's gift to investors.

The other thing, as has been pointed out, is that there are always funds that outperform their benchmarks during any specific period. IOW, there are always monkeys whose dart-throwing produces a good score.

The S&P SPIVA reports, however, show that the longer the time period, the fewer monkeys will excel. It's down to a few percent looking over 10 years. S&P Manager Persistence reports show that it is impossible to pick the lucky monkeys ahead of time. Ken French also discusses these facts in two videos: https://famafrench.dimensional.com/videos/is-this-a-good-time-for-active-investing.aspx and https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

So the monkeys at American get lucky once in a while? Please wake me when there is something unusual in the news.

So they cherry picked the time period of the last 41 1/2 years? Genius!

 

[OldShooter]

So they cherry picked the time period of the last 41 1/2 years? Genius!

Apparently they had to reach back that far to find some performance that would carry their later underperformance, as @pb4uski's Portfolio Visualizer runs indicate. They also chose what is probably an inappropriate benchmark as @samclem points out. Finally, we don't know whether there were other American equity funds in 1976 that were subsequently merged or closed. Survivorship bias is a powerful tool for hucksters and given that 7% of mutual funds fail every year it seems likely that American would have had some failures during that long time period.

I don't have a lot of appetite to analyze the details of hucksters' advertisements though. There are too many hucksters and some of them are very clever guys. The semiannual S&P SPIVA and Manager Persistence reports tell me all I need to know.

 

[travelover]

So they cherry picked the time period of the last 41 1/2 years? Genius!

If you like 'em, buy 'em. Don't listen to us fools.

 

[ESRwannabe]

Vanguard's actively managed funds often beat their index benchmarks for decades of time. There is nothing inherently bad about active management. Higher fees make it harder to beat an index, but not impossible.

Psst, Wellessley...

 

[Telly]

You can only buy American Funds through an advisor. Their 1% AUM isn't included in the comparison?

I assume you are describing a situation where the investor pays an annual fee (say 1%) for an "advisor" to watch their stash, above and beyond any per-fund expenses required by the mutual fund company?

A typical AF setup is the investor buys the AFs through an official AF advisor. The advisor is paid by AF via the 12b-1 fee, which is part of the fund's expense ratio. The advisor gets a fraction of a percent via 12b-1.

I'd like to get 1% for watching someones assets!

 

[flintnational]

Beyond higher fees, listed below are the problems I have with actively managed funds (Even benchmark beating active funds).

1) Is the out performance caused by allocation. Often higher returns equal higher risk.

2) If it is true out performance, is it something other than random chance. Chance will not persist.

3) If it is skill from a talented manager, how do we know the manager will continue to make good decisions in the future.

4) If it is skill from a talented manger, will his success preclude future success. Warren Buffet routinely admits due to the size of BH opportunities are limited.

 

[MRG]

I assume you are describing a situation where the investor pays an annual fee (say 1%) for an "advisor" to watch their stash, above and beyond any per-fund expenses required by the mutual fund company?

A typical AF setup is the investor buys the AFs through an official AF advisor. The advisor is paid by AF via the 12b-1 fee, which is part of the fund's expense ratio. The advisor gets a fraction of a percent via 12b-1.

I'd like to get 1% for watching someones assets!

Think it depends on the fund class. Class A, front end loaded funds, generally don't have a 12b-1 fee. Class C, generally don't have a front end load but do have 12b-1 fees, and sometimes trailing sales fees.

I've never bought any of these type funds, but I know people do. One thing I know, after a while the measly 5.75% FE load in class A shares isn't enough money.

Of course there is no way any advisor is going to forget to make your money his.

 

[ncbill]

In addition to the other good points (about expense ratios, front-end loads, statistical cherry-picking, etc.), one other consideration:

If I remember correctly, looking at yearly capital gain distributions from some of the American funds recently, those distributions seemed fairly high...

To do an “apples to apples” comparison of an actively managed fund against a tax-managed fund, or even against an index fund (which presumably would tend to have lower turnover than an actively managed fund), one would have to factor in the tax impact of capital gain distributions.

Yep, and the above negative also applies to a "dividend stock" investing strategy (forced to take a distribution and its tax consequences whether or not you want it)

 

[jabbahop]

Tax bite

In addition to the other good points (about expense ratios, front-end loads, statistical cherry-picking, etc.), one other consideration:

If I remember correctly, looking at yearly capital gain distributions from some of the American funds recently, those distributions seemed fairly high.

Please point out if this logic is “off,” but:

To do an “apples to apples” comparison of an actively managed fund against a tax-managed fund, or even against an index fund (which presumably would tend to have lower turnover than an actively managed fund), one would have to factor in the tax impact of capital gain distributions.

Have never seen an actual analysis on this, but have long suspected that turnover ratios (as a proxy for capital gain distributions) would be, like expense ratios, enough to tip the balance for “real” returns in favor of index or tax-managed funds, even if some actively managed funds have higher “nominal” returns on paper.

As a former American funds owner (younger and too busy to do my own homework), I can vouch for the tax hit not being communicated well. We were in accumulation phase and high tax bracket and would get these whopper cap gains payouts we didn’t need/want at the time.

While the funds did well relative to metric, after load, fees, and tax hit, i am sure they were at best average.

Happy to be “smarter “and investing on our own with vanguard indexes and virtually no fund generated cap gains the last two years.

 

[OldShooter]

Just another thump on the cherry-picking drum: American appears to offer 16 actively-managed pure equity funds: https://www.capitalgroup.com/institutional/investments/americanfunds?symbolsview=on I wonder how many combinations of five different funds (and how many time preiods) they tried before coming up with the combination that they advertised.

... 1) Is the out performance caused by allocation. Often higher returns equal higher risk? ...

This is actually quite a popular scam. A manager of, for example, a large cap fund will try to juice his returns by adding stocks that are outside his charter. Then, if it works, he crows that he has beat the S&P 500.

... 2) If it is true out performance, is it something other than random chance. Chance will not persist.

3) If it is skill from a talented manager, how do we know the manager will continue to make good decisions in the future.

4) If it is skill from a talented manger, will his success preclude future success. ...

I think that Fama and French have done a pretty good job of answering these questions. S&P's semiannual Manager Persistence report cards also answer:

There is no statistical evidence that manager skilll exists. In fact, in many cases a hot manager will subsequently perform below what would be expected from pure randomness. This, it is speculated, may be due to his having attracted the burden of new money.

My test is always this: If a manager really had skill, he would be on a tropical island somewhere sipping from a glass garnished with an orchid. He would not be stuffing himself into a suit every morning and commuting to an office building in order to draw a salary and sell his skills to schlubs like us for a few basis points. IOW, if such a manager even exists he will be invisible and inaccessible, happily making a few trades every time his checkbook gets low. Ken French talks about this here: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspxL Listen carefully when he talks about "rents."

Often when I make a post like this one, there are responses from people who identify funds that have performed above their benchmarks. This happens but not predictably. The plural of "anecdote" is not "data" however.

I am 99.9% certain that no data contradicting Fama/French and the S&P SPIVA and Manager Perisistence reports exists, however. If there were such data, the huge number of people whose rice bowls are threatened by the truth would be pounding us over the head with it. Instead, all they offer is anecdotes and FUD.