American Funds vs indexing - data/study?

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esteen
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American Funds vs indexing - data/study?

Post by esteen »

Most of us on this board agree that the Boglehead way of keeping costs to a minimum and investing in indices is the way to maximize returns in the long run. Various studies like SPIVA or Morningstar's active vs passive report have good broad-based data that show most active funds fail to beat the market over significant time periods, persistence is rare, etc.

But American Funds is always advertising their outperformance over the long haul. And I know a whole lot of people who believe it. My question is: can anyone point me to studies done by unbiased sources (i.e. not AF's marketing dept) that shows the true net returns of popular AF funds vs the appropriate indices? I want data specific to AF funds, not just active funds in general. Frankly I hope to use that data to substantiate my current belief that most don't, on average, beat the market net of costs (incl loads). But if objective data proves me wrong I'd like to think I'm open to adjusting my worldview.

Thanks in advance!
This post is for entertainment or information only, and should not be construed as professional financial advice. | | "Invest your money passively and your time actively" -Michael LeBoeuf
hnd
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Re: American Funds vs indexing - data/study?

Post by hnd »

When you backtest a combination of their popular funds to equate the appropriate indexes (take their large value and large growth 50/50 and compare it to sp500) and take into consideration the front load of each deposit and they've under performed some time. It's why they don't compare their "after sales charge" returns to whatever index on their website.

Take their no load fshares and I think a diy investor not paying an advisor, the AF funds do beat it out...barely. Pay any aim to an advisor and no such luck.

I'm a fan of the way AF does business and there is a reason many of their funds rank in the top 10 regarding assets under management. My parents have been invested in them for 30 years and their advisor and AF literature have helped them stay that course and succeed. VG and indexing may have worked to.
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esteen
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Re: American Funds vs indexing - data/study?

Post by esteen »

Thanks for the reply. I was going to go down the route of pulling all the data online and trying to recreate historical performance on AF funds, but frankly I was hoping someone else has done it first! And more comprehensively than I could hope to do.

Anyone else seen data on AF net performance?
This post is for entertainment or information only, and should not be construed as professional financial advice. | | "Invest your money passively and your time actively" -Michael LeBoeuf
02nz
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Re: American Funds vs indexing - data/study?

Post by 02nz »

Don't fall for their propaganda. See this thread: viewtopic.php?f=10&t=281154

Basically:
- The funds they tend to advertise as having outperformed since 1976 or whatever are nothing like what they used to be. They are much larger today, with less potential for outperformance. The manager that produced those great returns is long gone.
- The great performance of the early days (45 years ago) gives the fund a huge leg up in the charts and obscures their middling recent performance.
- Often the benchmark is the S&P 500, but several of the funds are growth funds, so a fairer comparison would be something like the Vanguard Growth Index Fund. This makes the funds look better during the recent past (which has been great for growth) than a fair comparison would.
snailderby
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Re: American Funds vs indexing - data/study?

Post by snailderby »

American Funds has several funds with good track records. If you had to choose an actively managed mutual fund family, you could do a lot worse than American Funds, T. Rowe Price, or Vanguard.

One study by Larry Swedroe found that the "only actively managed fund family in the group that added value when compared to both Vanguard and DFA (though in the second case by only a small margin) was American Funds." In addition, "American Funds also showed positive alphas relative to each of the factor regressions." https://www.advisorperspectives.com/art ... -investors.

Another article by Larry Swedroe noted the following about American Funds, specifically:
There’s a lot about the firm to admire. It keeps expense and turnover ratios relatively low. And, like I mentioned previously, it doesn’t rely on star managers that can leave the firm. What’s more, its managers make significant investments in the funds they run. In addition, factor analysis demonstrates that they tend to avoid the “style drift” which can cause investors in actively managed funds to lose control over their asset allocations and, as a result, the risk of their portfolio.
On the other hand:
A growing asset base creates an ever-higher hurdle for active managers because either the cost of trading can increase (market impact costs rise) or they are forced to diversify more (and become closet indexers).
And:
For taxable investors, even though the turnover of the American Funds offerings we’ve used in our analysis is low for an active manager, it was still about 20% higher in this period than for the comparable funds from DFA and Vanguard. Given the firm’s slight advantage in pre-tax outperformance (0.1 percentage points versus DFA and 0.2 percentage points versus Vanguard), that higher turnover easily could have resulted in lower after-tax returns.
Source: https://www.advisorperspectives.com/art ... erformance
snailderby
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Re: American Funds vs indexing - data/study?

Post by snailderby »

One thing to note about the study cited above: It used the lowest cost share classes for American Funds that are typically only available in retirement plans.

Notably:
American Funds has a variety of other share classes that it claims allows it “to compensate your financial professional for helping you decide which funds are right.”

While the gap between the expense ratios of the lowest-cost and highest-cost funds in share classes from DFA and Vanguard can typically be measured by counting basis points on the fingers of your two hands, the same gap between the American Funds share classes can be more than 1.2 percentage points. And some of the share classes come with sales charges, deferred sales charges or hefty 12b-1 fees (up to 1%).
In other words, if you're purchasing American Funds mutual funds through your advisor, you could be paying front or back end sales loads plus a higher expense ratio.
Last edited by snailderby on Tue May 18, 2021 9:02 pm, edited 2 times in total.
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typical.investor
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Re: American Funds vs indexing - data/study?

Post by typical.investor »

esteen wrote: Tue May 18, 2021 4:49 pm Thanks for the reply. I was going to go down the route of pulling all the data online and trying to recreate historical performance on AF funds, but frankly I was hoping someone else has done it first! And more comprehensively than I could hope to do.

Anyone else seen data on AF net performance?
We discussed this previously at viewtopic.php?f=10&t=276917

When I looked, American Funds return data was based on their Class A shares (lower ER but has a sales load) and then they didn't calculate the load into the returns. Their site also stated "F-1 Share data is not available ; please click here for a chart based on an investment in Class A shares." ... which might be what you are looking for but it wasn't helpful when I looked.

Anyway, American Funds is fond of using the best case for their returns but doesn't reflect the actual cost and one should remember:

(as cited by nisiprius in the above thread)

Buy Class A shares from a broker -- pay sales load, and brokerage commission.

Buy Class F1 shares from a broker -- pay 12b-1 fee and thus high expense ratio, and brokerage commission.

Buy Class F3 shares from an advisor -- pay advisor's fee.
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Raybo
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Re: American Funds vs indexing - data/study?

Post by Raybo »

Another trick is to use a version of the S&P500 index that doesn’t include dividends.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
prd1982
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Re: American Funds vs indexing - data/study?

Post by prd1982 »

I do want to point out:

* the load depends on how much you invest in American Funds. So if you invest 1-million, there is no load.

* you get a financial advisor / sales person to hopefully help you. I think the advisor I had was as helpful as PAS. We stuck with only AF, so I don’t think he made any suggestions that he didn’t think were in my best interest. After all, the pay rate was the same. We rebalanced periodically, but didn’t chase that year’s hot mutual fund.

I personally thought it worked out well. Remember this was years ago before index funds were touted in all the mainstream journals.

I’m not suggesting people switch to AF. But if your parents used them, it likely worked out better than watching Cramer.
Kelly
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Re: American Funds vs indexing - data/study?

Post by Kelly »

I tried a match factor regression here with their growth fund of America https://tinyurl.com/b23eareh

It's not clear if PV correctly matches US and non-US data. The fund is 10% non-US but the factor clone 45%???
m@ver1ck
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Re: American Funds vs indexing - data/study?

Post by m@ver1ck »

What about survivorship bias? Are they also using funds that got shut down over time for non-performance?
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retired@50
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Re: American Funds vs indexing - data/study?

Post by retired@50 »

m@ver1ck wrote: Wed May 19, 2021 9:47 am What about survivorship bias? Are they also using funds that got shut down over time for non-performance?
The CRSP Survivor-Bias-Free database might be of interest to you...

See link: http://crsp.org/products/research-produ ... tual-funds

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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jeffyscott
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Re: American Funds vs indexing - data/study?

Post by jeffyscott »

prd1982 wrote: Tue May 18, 2021 7:51 pm I do want to point out:

* the load depends on how much you invest in American Funds. So if you invest 1-million, there is no load.
You can also avoid loads by buying their "F" class at Schwab, Fidelity and, I assume, others with no load, no transaction fee, and low minimums. For example American Funds Investment Company of America Class F-1 (AICFX) with ER of 0.65% and $100 minimum at Schwab, $250 at Fidelity, NTF at both.
hnd
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Re: American Funds vs indexing - data/study?

Post by hnd »

I own Fshares of Growth fund of america and EuroPac Growth fund. over the past 15 years they've effectively tracked their indexes. 20% of my portfolio is designated for active management and is effectively 7% Large Growth (3 funds), 7% Small Value (DFA, AVantis), 3% Large International Growth (AF), 3% Emerging Markets (Avantis)
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Kenkat
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Re: American Funds vs indexing - data/study?

Post by Kenkat »

The are decent actively managed funds with relatively low cost and turnover under certain situations. If for example they are the only choice in a 401k where the sales loads would be waived and using lowest cost shares, you could do just fine with them. That said, there’s not a compelling reason to pick them over index funds if those are available to you at lower cost.
heyyou
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Re: American Funds vs indexing - data/study?

Post by heyyou »

Not on topic but with some relevance.
Beware of the lure of more money from supposedly higher performing sources. Doesn't it make sense that someone can beat the market for a short while, followed by under-performance? Long term, indexing prevails but there is always some other more recent winner, for shorter periods.

Yes, costs matter, but 5 or 10% more savings annually, for the next decade or two, will make a much bigger difference than shopping for higher performing funds.

My portfolio growth improved when I chose to just accept whatever the lower cost index providers delivered, but with my trying to continually save more each day/month/year i.e. directing almost all of each pay raise into savings. Thus my daily "not spending" decisions boosted my portfolio size and slowly acclimated us to lower cost living which allowed us to both retire at my age 55.
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