Author Topic: American Funds Claim that they can dunk a basketball  (Read 5850 times)

forestj

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American Funds Claim that they can dunk a basketball
« on: July 23, 2015, 09:57:27 PM »
First off I apologize for making this thread ahead of time, I already did search for threads on American Funds and mostly found that American Funds was immediately dismissed in favor of Vangaurd. Reference was made to Bogle's ideas, but no hard evidence was presented regarding American Funds ability to beat the index funds enough to compensate for the fees.

I just had the 401k meeting with a rep from American Funds, my company's 401k provider. I have been avoiding them because I know that they only offer actively managed funds with high expense ratios, and my company's flat 6% match isn't fantastic compared to the compounded expense ratio.

When I asked the rep about actively how his managed funds add value and if they can really outperform an index fund. He had some great marketing copy for a response. His argument boils down to this: Yes, most actively managed funds don't add enough value to account for the fees, and yes, past results do not guarantee future returns. However, he claims that his funds perform better than most actively managed funds and they have been for a long time. He also stated that American Funds has a few properties which are strongly correlated with successful actively managed funds according to Morningstar: Their fund managers and other executives primarily invest in their own funds, and their expense ratios are lower than the average competitor. The analogy that he gave was "Statistically, most Americans can't dunk a basketball. But that doesn't mean that no American can dunk a basketball."

I'm new to investing and I'm not sure how to actually verify or refute those claims. I'm not asking for ya'll to do the research for me, and I'm also not asking you to tell me that Vangaurd exponentially better just because everyone else is saying it.

I'm just curious about how people actually verify these things -- if there are any good data sources to compare apples to apples from a retail investor's perspective. I don't trust the glossy brochure he handed me, so I'm looking for an unbiased source of information that would be hard to fake or manipulate. Does such a thing exist ?

Cressida

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Re: American Funds Claim that they can dunk a basketball
« Reply #1 on: July 23, 2015, 10:14:42 PM »
I'm not much help on your actual question, I admit. But I had to pop in because DH got exactly the same song-and-dance from American Funds last week (I don't know if they specifically mentioned basketballs, but I do know he trotted out the "managers invest in their own funds" line). Apparently DH's employer (small startup) chose American Funds because the CEO is chums with an advisor who recommended them. No doubt that dude got paid for his trouble, and is now getting the fee from DH's employer as well. Nice gig.

It's better than *no* 401(k), but not much.

MDM

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Re: American Funds Claim that they can dunk a basketball
« Reply #2 on: July 23, 2015, 10:21:42 PM »
Don't know about a specific study of American Funds, but see the links below.

Unbiased (AFAIK) data collection often referenced in other articles: http://www.spindices.com/documents/spiva/spiva-us-year-end-2014.pdf 

A couple of those articles: http://www.nytimes.com/2015/04/05/your-money/measure-for-measure-index-funds-rule.html?_r=0 and http://www.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html?_r=0.

johnny847

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Re: American Funds Claim that they can dunk a basketball
« Reply #3 on: July 23, 2015, 10:36:04 PM »
When I asked the rep about actively how his managed funds add value and if they can really outperform an index fund. He had some great marketing copy for a response. His argument boils down to this: Yes, most actively managed funds don't add enough value to account for the fees, and yes, past results do not guarantee future returns. However, he claims that his funds perform better than most actively managed funds and they have been for a long time.

If he truly believes what he says, then the fact that they have been performing well (which I doubt actually, but whatever) is irrelevant.

He also stated that American Funds has a few properties which are strongly correlated with successful actively managed funds according to Morningstar:

Correlation doesn't imply causation.

The analogy that he gave was "Statistically, most Americans can't dunk a basketball. But that doesn't mean that no American can dunk a basketball."

That's true. But let me put the ball back in his court: because we cannot use past performance as a metric, then how do we go about finding those few Americans who can dunk a basketball?


Just Google for actively managed mutual fund study and you'll find plenty of them. Read through them yourself. Make sure to take into account who funded the study.

forestj

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Re: American Funds Claim that they can dunk a basketball
« Reply #4 on: July 23, 2015, 10:49:58 PM »
Maybe I should make a website where you can anonymously publish your investment returns, like glassdoor but for mutual funds... Although that would be hell to verify and prevent fund managers from spamming it.

It's an interesting problem... The fund managers control the information for the most part, but they are also the least trustworthy. And people generally don't like giving out their financial details to websites.

Frankies Girl

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Re: American Funds Claim that they can dunk a basketball
« Reply #5 on: July 23, 2015, 11:01:20 PM »
Strictly anecdotal, but I had a job early in my career that used American Funds. I didn't understand much about investing at all, so I had very little invested thank goodness.

Things I learned about them:

Usually used as the investment company option for smaller companies. This is because they get to sell their front loaded funds to the participants (the employees participating), and therefore charge less to the company itself for having a retirement plan. This is a big selling point to the employers that think they are providing a great investment/retirement option for their employees, but it actually is kind of sucky that the employer does this, because they may not understand that there are better options (less costly and better performing funds) plan providers with better investment options (lower expense ratios, no plan fees, etc.). And the suck part is their lack of understanding/laziness in researching plan providers results in making you pay more to invest your own money.

American Funds = lots of front-loaded funds. These are almost across the board horrible, because they skim several percentage points right off the top from your contribution as a fee for just getting to invest. I still don't understand how anyone can justify front or back end loads, and they should be outlawed... especially since they are all managed funds and never perform as well when you take into account the front load, and the expense ratio.

What the rep told you is not unique to them. Most places like them are going to do the "we are so awesome our funds are worth the extra expense and you won't be able to find better so don't even bother looking" in some form or another. It's what they do - they are sales people first and foremost, so they'll continue to try to sell you on their funds and do whatever possible to keep you from leaving.

That being said, I'd try asking your plan administrator (at your company) if they would consider using Vanguard instead of American Funds, and if they don't, just hold your nose and keep investing with them until you change jobs. Because even a stinker of a plan is better than no plan.


milesdividendmd

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Re: American Funds Claim that they can dunk a basketball
« Reply #6 on: July 24, 2015, 03:01:19 AM »
If you want to substantiate (or disprove) his claim it is easy enough to test.

Simply take his funds ticker and plug it the morningstar website and look up what style the fund is.  Eg If it is a large cap value fund then compare it to the Vanguard large cap value fund with a backtest on portfolio visualizer.

Keep in mind that this is still subjuct to survivorship bias since American Funds might have had another active large cap value fund that underperformed and was folded.  But despite this I would wager that 8/10 American Funds lose to Vanguard or other low cost passive indices over 10 year horizons.

Rural

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Re: American Funds Claim that they can dunk a basketball
« Reply #7 on: July 24, 2015, 05:29:46 AM »
You want that 6% match, though, OP. That's not the equivalent of a 6% return because you can put in just enough to get the match. If that means you put in 6% of your salary and get 6%, that's an instantaneous 100% return. If you have to put in 12%, well, 50% is still nothing to sneeze at.

forummm

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Re: American Funds Claim that they can dunk a basketball
« Reply #8 on: July 24, 2015, 06:50:55 AM »
The salesman (that's what he is) is paid well to lie to you. It sucks that your company doesn't care enough about its employees to provide better options for you. Take their match for sure. Maybe even max out the account after maxing out your IRA (and spouse's IRA and 401k if you have a spouse). Just roll it over into a Vanguard IRA as soon as you leave that company.

bdbrooks

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Re: American Funds Claim that they can dunk a basketball
« Reply #9 on: July 24, 2015, 08:53:16 AM »
As someone pointed out, you have to watch out for survivorship bias. These companies will roll out dozens of mutual funds each year. Meanwhile, they will also dissolve several poor performing funds that are a few years old.

There is also something called "Persistence of Returns." Mutual funds in general don't have persistence of returns. Meaning that funds that have outperformed the market in the past are not more likely to outperform the market in the future. This is something that very very very few people understand. I worked at a financial planning company and the head advisors would always look at the top returns over the last 5-10 years. It took me a while to convince them that there was better ways to do things. This shows that even salesmen "professionals" get caught up in the trap of performance chasing.

I am not a hardcore indexer. However, I you have to keep your investing cheap. With that being said, I would contribute enough to get the match. You instantly get 100% return. Even with 3% fees it would take a full working lifetime for that to overcome the match. Everything last the match I would be putting in (Roth) IRAs and taxable accounts.

uwp

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Re: American Funds Claim that they can dunk a basketball
« Reply #10 on: July 24, 2015, 12:51:15 PM »
First of all, a 6% match is pretty great, even when you look at expense ratios.  You are getting a straight up 100% return on day one.  That can pay for a lot of fees going forward. 

And second, I know it is sac-religious here, but American Funds are really not that bad.  Depending on what kind of fees you are paying (loads, C-shares, R shares) they can actually stack up pretty well.  Certainly good enough to take the free money.   

Anyway, like the other answers said, get the ticker symbols of your options and punch them into a good website (I'll recommend Morningstar.com for mutual fund research), and then compare their numbers against a Vanguard index for the same category (Large Cap Growth, Large Cap Value,etc etc.).  The nice thing about American Funds is they have been around forever, so these funds should have long track records.

forummm

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Re: American Funds Claim that they can dunk a basketball
« Reply #11 on: July 24, 2015, 01:53:03 PM »
First of all, a 6% match is pretty great, even when you look at expense ratios.  You are getting a straight up 100% return on day one.  That can pay for a lot of fees going forward. 

And second, I know it is sac-religious here, but American Funds are really not that bad.  Depending on what kind of fees you are paying (loads, C-shares, R shares) they can actually stack up pretty well.  Certainly good enough to take the free money.   

Anyway, like the other answers said, get the ticker symbols of your options and punch them into a good website (I'll recommend Morningstar.com for mutual fund research), and then compare their numbers against a Vanguard index for the same category (Large Cap Growth, Large Cap Value,etc etc.).  The nice thing about American Funds is they have been around forever, so these funds should have long track records.

OP didn't specify what funds he has available. I've seen quite a few people post with big loads like 6% (possibly going to the advisor), or even 2% ERs. Hence why people here don't like them.

TomTX

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Re: American Funds Claim that they can dunk a basketball
« Reply #12 on: July 24, 2015, 08:46:07 PM »
I'm not much help on your actual question, I admit. But I had to pop in because DH got exactly the same song-and-dance from American Funds last week (I don't know if they specifically mentioned basketballs, but I do know he trotted out the "managers invest in their own funds" line). Apparently DH's employer (small startup) chose American Funds because the CEO is chums with an advisor who recommended them. No doubt that dude got paid for his trouble, and is now getting the fee from DH's employer as well. Nice gig.

It's better than *no* 401(k), but not much.

The employer might have the recent Supreme Court ruling (Tibble V Edison) pointed out to them. The employer has a legal obligation to offer low cost options.

http://www.forbes.com/sites/nextavenue/2015/05/20/what-the-supreme-courts-401k-ruling-means-to-you/

mrpercentage

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Re: American Funds Claim that they can dunk a basketball
« Reply #13 on: July 24, 2015, 10:35:41 PM »
Depends on the share. Class A shares have a lot of fees and a sales load. If they offer your company R shares they can be very competitive.
Some drop the expense ratio down to 0.34% and have no load. They do have some really good funds.
RIDFX  (AMECX is the class A version) is not doing so hot right now mainly because of the looming interest rates but has a great track record all the way back to the 70's.
ANEFX (Class A version don't know the R's ticker symbol) is a great growth fund that has been outperforming the market well.
Having additional options for your 401k shouldn't hurt. If you have any sway on what gets elected into your 401k then push american funds to give higher grade R shares.
RIDFX is and R-5 for example.

Poopstache

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Re: American Funds Claim that they can dunk a basketball
« Reply #14 on: July 28, 2015, 09:12:10 AM »
Keep in mind to check the fine print on American Funds. Edward Jones had my mother's monies invested in 8 or 9 different funds most of which charged a 2% fee to reinvest dividends. That could have been an EJ add on but either way her retirement is with Vanguard now. Just double check on all fees.

NorCal

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Re: American Funds Claim that they can dunk a basketball
« Reply #15 on: July 29, 2015, 05:24:34 PM »
If they're so good, just ask them what their policy is on refunding fees if they underperform the market :-)