(PUB) Morningstar FundInvestor

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The Empire Strikes Back Morningstar Research | John Rekenthaler

Success Percentage

All Active Funds

American Funds

Time Period

Success %

Success %

1 Year 3 Year 5 Year 10 Year 20 Year 30 Year

47 50 51 51 42 38

57 62 67 73 83 98

Capital Group is on a PR tour. Making the media rounds does not come naturally to the company, any more than winning the Rose Bowl does to Cal Tech, but something had to be done. For the past half-decade, at the very least, index-fund proponents and exchange-traded fund marketers have owned the public discussion. As a result, active stock-fund managers are typically portrayed in the general media as useless at best, and harmful at worst. As the largest such manager, via its American Funds, Capital Group has had the most to lose. And lost, it has. Over the past few years, it has shed more than $ 200 billion of assets in net redemptions, most from its equity funds. Meanwhile, index funds and ETF s have gained more than $ 1 trillion of new monies. The Empire has received a thrashing. Now it’s telling its side of the story, via a study enti- tled “The active advantage: A history of delivering persistent above-benchmark returns.” (Perhaps not the most engaging of titles.) Ostensibly, the study showcases the strengths of active management in general, as opposed to just those managers working at American Funds. How- ever, that’s not how the numbers play out. They show American Funds to be good. The rest of the industry, not so much. The most notable aspect of the study is its long time horizon. Capital Group begins the analysis in 1934 . From that point forward, it looks at all rolling one-, three-, five-, 10 -, and 30 -year (!) time periods, comparing the total returns of a) active stock funds overall and b) only those from American Funds, against the returns of a relevant index. It’s not the perfect study, but it’s a good starting point because it has a whole lot of data points and the results are easy to interpret.

Source: Morningstar

Capital Group also looked at something it calls persis- tency, which measures the percentage of times that a winning fund (that is, a fund that beat an index) also won over the very next time period of equal length.

“Persistency” Percentage

All Active Funds

American Funds

Time Period

Persistency % Persistency %

1 Year 3 Year 5 Year 10 Year 20 Year 30 Year

53 50 51 42 28 49

62 60 64 64 80 96

Source: Morningstar

As is customary for performance studies, whether generated by American Funds, Morningstar, or academic researchers, fund returns are calculated net of all ongoing fees (that is, annual expenses) but do not include the effects of load charges. Five Thoughts 1 ) The success percentage for all active funds is much higher than generally believed. For the longer time periods, this is due largely to survivorship issues, as the most successful actively managed stock funds tend to stay in existence, and the less successful are merged away. (The same holds true for index stock funds.) Realistically, somebody purchasing a random stock fund at any point in the past 78 years and then holding it for the next 30 years would not have had a 38% chance of outgaining the relevant index. There’s a very good chance that our investor would have been