Wharton MBAs & Harvard undergrads can't evaluate cheap index funds

[justin]

Instead of CAIBX, why not buy 65% VG Equity Income fund with a 2.82% yield and 35% Intermediate term investment grade Bond fund with a 5.53% yield. Half the annual expense, no up-front sales charge, and 30 basis points more yield.

 

[doushioukanaa]

A couple of reasons...

The dollar is going down the toilet and your suggested mix provides insufficient international exposure.  CAIBX finds the best opportunities including the US, and irrespective of geography.  That's part of the reason their 5 year return trounces Vanguard Equity Income. 

Also, the Vanguard fund has a single manager, John Ryan.  Who knows how long he will be on board?  CAIBX has a team of managers with great track records.  If one of them gets hit by a bus, the fund will carry on. What happens if John Ryan gets hit by a bus?

 

[cute fuzzy bunny]

I'd have to go look and i'm too lazy to do it, but i'm pretty sure the vanguard equity income fund is partially managed by about a bazillion people...I think the wellington management folks and the vanguard quant group is involved, among others?

 

[justin]

I'd have to go look and i'm too lazy to do it, but i'm pretty sure the vanguard equity income fund is partially managed by about a bazillion people...I think the wellington management folks and the vanguard quant group is involved, among others?

Correct. And I looked at the fund total holdings - $4.4 billion in assets under management, versus the bloated Capital Income Builder with 10x the assets under management.

I own a fair amount of CAIBX from my days with Edward Jones, but given the high front end loads, I wouldn't buy it again today when there are cheaper options (and since I don't care much about current income).

 

[cute fuzzy bunny]

I'm not super fond of either, I like windsor II in place of the equity income fund, although its taken on a lot of money lately and that usually doesnt end well...

 

[Nords]

I guess the real problem is that you have no guarantee whatsoever that the historical performance, style, management, etc. of a managed fund will continue to persist.

No refunded management fees for bad years, either!

 

[doushioukanaa]

I own a fair amount of CAIBX from my days with Edward Jones, but given the high front end loads, I wouldn't buy it again today when there are cheaper options (and since I don't care much about current income).

I agree one should not buy CAIBX unless you have enough in American Funds to buy at NAV or one of the lower breakpoints.  5.75% is highway robbery, but it means the onesey twosey investors subsidize the returns of people who can hit the breakpoints.

The point about scale is very well taken.  It's going to be more challenging to manage going forward, but I think they have the systems to do it.

One other factor I thought about is that the annual fee applies to the bond portion as well, which means effectively the equity fee is higher than the sticker price when you consider fixed income fund costs are usually lower.

But is there a combination of index funds that can sorta emulate CAIBX, including the international component at a far lower cost?  I'm interested to try and back test it and see how it performed, especially in 2002.

Also, is there a way to find out to what extent fund managers have their own personal investments within their funds?

Actually I was kinda shocked this year...CAIBX and Capital World Growth and Income both had "special" dividends at the end of the year in addition to the normal dividend.  It seemed kind of weird, and I'm guessing it's just a way to mask a fee decrease so that they don't need to make it permanent.

 

[unclemick]

Duh

We've been down this road before - what's wrong with those MBA cats.

John C Bogle explains how to beat index funds the old fashioned way in his Nov. 12, 1997 speech to The Assoc. For Investment Management and Research.

William Bernstein quantifies your odds of doing so in with his 15 Stock Diversification Myth article in Efficient Frontier.

The Norwegian widow just smiles and collects her dividends.

I'll leave Fama and French, the value premium, etc to the academics.

Send them to Chicago School of Finance.

heh heh heh - first cup of coffee - and I confess my male hormones cause me to peek at stock holdings of 'good' value funds for ideas from time to time.

 

[justin]

I agree one should not buy CAIBX unless you have enough in American Funds to buy at NAV or one of the lower breakpoints. 5.75% is highway robbery, but it means the onesey twosey investors subsidize the returns of people who can hit the breakpoints...

...But is there a combination of index funds that can sorta emulate CAIBX, including the international component at a far lower cost? I'm interested to try and back test it and see how it performed, especially in 2002.

The onesey twosey investors aren't subsidizing the returns of the breakpoint buyers. They are lining the wallets of their brokers. The sales loads go to compensate brokers and not into the fund's general accounts.

As to emulating CAIBX with index funds, I'm sure one could data mine until they found an optimal combination of funds. CAIBX is heavily tilted towards international, large cap and value. If I wanted to emulate their returns using low cost funds, I'd try 28% VIVAX (VG Value index), 37% VTRIX (VG International Value), and 35% VBISX (VG Short Term bond index).

That combination is based on CAIBX's current portfolio allocations. Not sure how they were positioned historically over the last 5-10 years. I seem to recall they had a smaller allocation to international investments a few years ago.

I'd be interested to see how a mix of the 3 VG funds would have done over the 2000-2006 period. FYI, the VG funds have a composite expense ratio of 0.31% and zero sales loads.

And as always, past results will not necessary be repeated in the future.

 

[doushioukanaa]

Thanks for the ideas on emulation!  I didn't realize 100% of the loads go to the brokers.  Learn something new every day.

I guess that leaves me with a .26% annual premium paid for CAIBX versus the basket you recommend.  That is 83% more, which sounds large when you think about it, but could be dwarfed by just one year of outperformance.

So it comes down to whether the research resources and sustainability of the the American Funds management structure are worth that 83% premium.  I think I will continue to bet that I get a good value for the money even though the funds are becoming very large.  Does that make me as silly as those Harvard undergrads and Wharton MBAs?   

We shall see I guess...At least I will take comfort in not having paid any up front loads.

 

[2soon2tell]

Take a look at T. Rowe Price PRWCX.  5* rating, no load, reasonable ER
good returns

2soon

 

[doushioukanaa]

Thanks for the recommendation!

Actually, it looks like PRWCX's expense ratio is quite a bit higher than CAIBX.  It is also very highly weighted to US stocks.  Also, managed by Stephen W. Boesel.  What happens if he gets hit by a bus?  I don't think the fund family or this particular fund is for me.

 

[justin]

We shall see I guess...At least I will take comfort in not having paid any up front loads.

If you have $1,000,000 or more with american funds, it's probably not a bad fund choice. Compared to most actively managed funds, CAIBX's expense ratio is great! For the rest of us suckers with less than $1,000,000 to invest, we'll be paying an up front sales fee that is hard to justify when you have good alternatives available elsewhere for less money.

CAIBX does have a really high yield, presumably from high-dividend stocks, based on its extreme value tilt.

 

[doushioukanaa]

Thanks for the feedback and reassurance on the pick.

One point of information...I just checked with a friend who used to work for Edward Jones. He said about 85%-90% of the loads for American Funds go to the broker, so about 10%-15% goes toward the fund company. It varies by fund company I guess.