(PUB) Morningstar FundInvestor

January 2 014

Morningstar FundInvestor

9

dumped into another fund at some point during those three decades.

riskier. That suggests that if the study were done on a risk-adjusted basis, so that Sharpe ratios rather than total returns were the measure of success, all active funds would have fared worse and American Funds would have looked better. 5 ) Is American Funds’ success old news? In aggregate, hedge funds have great 30 -year figures— but that disguises the fact that they were terrific for the first 20 years, then mediocre since. The same might be true of American Funds; indeed, it probably is true given that the company now faces significant redemptions for the first time in decades. That stands to reason, but it doesn’t seem to be so. While American Funds didn’t withstand the 2008 market crash as well as most expected, which led to bad publicity and investor disappointment, the company’s stock funds have nevertheless kept pace with the indexes for the past five years and beaten them over 10 . In fact, in a hypothetical exercise com- paring the growth of $ 100 , 000 placed in a basket of American Funds and $ 100 , 000 placed in an index basket, American Funds fares best in recent years. It hangs around with the indexes through the 1980 s and 1990 s, then vaults past them beginning in 2000 . I suspect American Funds will recover its sales mojo. Fund performance has been good, and memories of 2008 will fade. Other active stock-fund managers will continue to struggle, even if Capital Group success- fully spreads the word that active managers as a whole are reasonably safe and acceptable alterna- tives to indexes. Safe and acceptable beats being financial poison, to be sure, but it’s not enough incen- tive to get investors to change their current habits. œ Contact John Rekenthaler at john.rekenthaler@morningstar.com

For the shortest periods, say three years and less, survivorship is much less of an issue, so that the true results are close to the indicated percentages. Thus, when looking out for a year or two, choosing between an active fund or a no-cost index fund (if such a thing existed) is not a big deal. It’s a roughly 50 / 50 proposition. Overall, the figures cast doubt on the popular notion that actively managed stock funds are dangerous to one’s financial health. They might not be particularly helpful, as a general rule, but not being particularly helpful is different from causing financial cancer. 2 ) The persistency of all active funds is disappointing. The percentage of winning actively managed stock funds that were able to beat the index a second time was similar to the overall success rate for actively run funds for periods of five years and less but fell off the cliff for the 10 - and 20 -year horizons. (The big improvement for 30 years is surely a fluke caused by a very small sample size.) Sequoia SEQUX , famously, has been strong decade after decade. But the indus- try can boast few such funds. Most funds shine for a while, then fade into mediocrity. The lack of persis- tency is the biggest strike against active management. No surprise there. American Funds has done well with its stock funds, over all time periods. Unlike with the all active list, these results are not aided by survivor- ship effects, as the organization has only killed off one stock fund during its history— 50 years ago. For the long-term owner, holding an American Funds stock fund has consistently been a sound decision. 4 ) What about risk? The study only lightly touches the subject. There’s a brief look at the U.S. equity subset, showing that the American Funds are about as volatile as the S & P 500 Index and “like funds of other active managers” (I’m not quite sure what that means) are substantially 3 ) The success percentage (and persistency) for American Funds is excellent.