Author Topic: Does American Funds really beat the market?  (Read 6624 times)

thorbjorn88

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Does American Funds really beat the market?
« on: March 15, 2017, 07:21:16 PM »
This add popped up on my facebook feed and I clicked it. Basically American Funds shows how a Vanguard Index 500 account would have done with $10,000 starting in 1976 and running through 2016 compared to four of their funds. I'm very new to stocks and investments and would love to hear what someone who know what they're talking about thinks of this. So what do you think of their claim?

https://www.americanfunds.com/individual/insights/investment-insights/five-american-funds-that-beat-the-first-index-funds-lifetime-results.html?cid=sm_fb_10224

East River Guide

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Re: Does American Funds really beat the market?
« Reply #1 on: March 15, 2017, 07:32:59 PM »
Some will do better, some will do worse.  Problem is knowing ahead of time which are which. 



Ricksun

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Re: Does American Funds really beat the market?
« Reply #2 on: March 15, 2017, 07:37:14 PM »
Sounds like a common brokerage tactic.  Start 50 funds, track them over 10 years, close the bottom 45 and you've got yourself a track record of exemplary performance in all of your active funds!  Who wouldn't want to pay a 5% upfront premium to invest with a proven long term winner??

thorbjorn88

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Re: Does American Funds really beat the market?
« Reply #3 on: March 15, 2017, 07:44:37 PM »
Yeah, I figured they were just cherry picking favorable accounts. Plus I didn't read the fine print super thoroughly but I think they only accounted for fees at the beginning not yearly.

Radagast

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Re: Does American Funds really beat the market?
« Reply #4 on: March 15, 2017, 08:13:06 PM »
Surprisingly, they generally do. I am not so sure they do after taxes, loads, and 12b fees are considered, so don't run off and invest in them without more research. I think a few of the reasons are that they invest in large, stable, profitable companies that other traditional market-beating funds (eg. the Vanguard "W" funds) invest in, that they invest in "sin" companies such as tobacco which seem likely to continue outperforming, and that most funds seem to invest in a variety of US and international stocks and bonds. Based on a superficial analysis. IIRC David Swensen also noted that briefly in his 2006 book.

Link:
https://www.advisorperspectives.com/articles/2015/06/30/can-american-funds-sustain-its-outperformance
« Last Edit: March 15, 2017, 08:30:16 PM by Radagast »

thorbjorn88

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Re: Does American Funds really beat the market?
« Reply #5 on: March 15, 2017, 08:58:17 PM »
Awesome article thanks Radagast!

MDM

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Re: Does American Funds really beat the market?
« Reply #6 on: March 15, 2017, 10:48:34 PM »

arcyallen2

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Re: Does American Funds really beat the market?
« Reply #7 on: July 26, 2017, 07:03:46 PM »
Ricksun: American Funds doesn't close funds like that. If you look at the ad it says it's -every- US equity fund they offered at the time. No cherry picking, no sleaze.
Radagast: Whenever you see a mutual fund performance, I've never seen it -not- include the 12b1 fee. That would be super, duper sleazy (like charging an undisclosed doc fee at a car dealership!) and American Funds doesn't do that. Honestly I don't think anyone does that. And thanks for the link! It's nice to see an article/opinion that's not heavily biased. Rare and appreciated.

JSMustachian

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Re: Does American Funds really beat the market?
« Reply #8 on: August 01, 2017, 01:34:54 PM »
I own both. In my experience, my American fund will beat out my Vanguard S&P500 by 4-5% one year but the following year will under-perform by roughly the same amount. Any of my future contributions always go to the Vanguard funds because the lower expenses is a guaranteed return.




Cwadda

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Re: Does American Funds really beat the market?
« Reply #9 on: August 01, 2017, 01:54:00 PM »
Do they take into account the fees eating into the profits? Probably not.

Mighty-Dollar

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Re: Does American Funds really beat the market?
« Reply #10 on: August 02, 2017, 03:28:14 AM »
Growth Fund of America is garbage. It has an R-Squared rating of 93 so it CANNOT beat its benchmark index after fees because it's basically copying its benchmark index! It has a 0.66 expense ratio and probably a nasty 5.75% front end load fee. Compare that with index funds which have about a 0.05% expense ratio and NO front end loads.
http://investingadvicewatchdog.com/mutual-funds.html


Radagast

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Re: Does American Funds really beat the market?
« Reply #12 on: August 02, 2017, 08:43:55 AM »
So they do not outperform after loads. Not too surprising I guess. An immediate 5.75% loss on all money contributed is a big mountain to climb.
Heh they even say it in the link from FourPercenter, except they show that none of their funds outperform after a load:
Ad in my Facebook feed pointed to this gem so I had to investigate https://www.americanfunds.com/individual/insights/investment-insights/five-american-funds-that-beat-the-first-index-funds-lifetime-results.html?cid=sm_fb_10224

1) Including the sales fee (which was conveniently left out in the chart) results in only one of their promoted funds beating the average over 10 years.
Bonus: sales charges were a whopping 8.5% prior to 1988! I know that reflects how everything was expensive about investing back in the day...crazy!
2) The one fund that did beat the index over 10 years was a large cap growth fund and that's just because that category has outperformed the S&P 500 during that time period.

Anyway, not surprised by the spin, but still enraging nonetheless
« Last Edit: August 02, 2017, 08:46:43 AM by Radagast »

arcyallen2

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Re: Does American Funds really beat the market?
« Reply #13 on: August 02, 2017, 01:13:22 PM »
While it's true that most of their funds have lagged in the last ten years (which happens on occasion, in which every single time in the above funds without exception they went on to outperform), those funds HAVE beaten the markets since inception, ESPECIALLY Growth Fund of America. That's after all expenses, loads etc. The ongoing management fees are always, always, always reflected in the performance of any fund. The load (0-5.75%) is a one time charge to pay for the advisor. If you don't want the advisor, you can get the same funds at Fidelity with no load (and no advisor).

Someone can argue about whether or not they will continue to outperform in the future. I think they will, but I understand the reasons people give for them not. But it's not up for debate: For the last 40+ years those funds have beaten the market. And their oldest fund AIVSX has been doing it for over 80 years.

arcyallen2

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Re: Does American Funds really beat the market?
« Reply #14 on: August 02, 2017, 01:30:49 PM »
I was reminded recently to "show my work" and give resources for data:
 
https://www.americanfunds.com/advisor/pdf/shareholder/mfgessx-004_icass.pdf
"Over its lifetime (1/1/34–12/31/16), ICA has returned an average of 12.1% annually, compared to 10.8% for the unmanaged Standard & Poor’s 500 Index"

Just as no one can promise what it'll do for the next 83 years, no one can deny what it's done for the last 83 years. If we can at least agree on the facts, -then- we can start talking about opinions! I'd love to talk about why (or why not) this might continue on into the future.

MDM

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Re: Does American Funds really beat the market?
« Reply #15 on: August 02, 2017, 02:01:42 PM »
I was reminded recently to "show my work" and give resources for data:
 
https://www.americanfunds.com/advisor/pdf/shareholder/mfgessx-004_icass.pdf
"Over its lifetime (1/1/34–12/31/16), ICA has returned an average of 12.1% annually, compared to 10.8% for the unmanaged Standard & Poor’s 500 Index"

Just as no one can promise what it'll do for the next 83 years, no one can deny what it's done for the last 83 years. If we can at least agree on the facts, -then- we can start talking about opinions! I'd love to talk about why (or why not) this might continue on into the future.
And for the past 10 years it has underperformed the S&P 500: https://www.morningstar.com/funds/XNAS/AIVSX/quote.html.

Some fraction of active funds will outperform comparable index funds over some time periods.  The difficulty is finding that fraction with foresight rather than hindsight.

Radagast

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Re: Does American Funds really beat the market?
« Reply #16 on: August 02, 2017, 02:20:03 PM »
While it's true that most of their funds have lagged in the last ten years (which happens on occasion, in which every single time in the above funds without exception they went on to outperform), those funds HAVE beaten the markets since inception, ESPECIALLY Growth Fund of America. That's after all expenses, loads etc. The ongoing management fees are always, always, always reflected in the performance of any fund. The load (0-5.75%) is a one time charge to pay for the advisor. If you don't want the advisor, you can get the same funds at Fidelity with no load (and no advisor).

Someone can argue about whether or not they will continue to outperform in the future. I think they will, but I understand the reasons people give for them not. But it's not up for debate: For the last 40+ years those funds have beaten the market. And their oldest fund AIVSX has been doing it for over 80 years.
In the link I just reposted, they showed it beating the S&P500 index fund with a 5.75% load, but in the fine text point out that the load was 8.5% until 1988. So actual investors who chose those funds instead of Vanguard S&P500 did much worse than they show. My guess is if they had beat the index fund after the load that they actually charged their investors in 1976 they would have posted those numbers instead.

arcyallen2

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Re: Does American Funds really beat the market?
« Reply #17 on: August 02, 2017, 03:42:31 PM »
I don't think 2.75% less is "much worse". Every one of them would have still handily beat the market by a large margin.

[Some fraction of active funds will outperform comparable index funds over some time periods.  The difficulty is finding that fraction with foresight rather than hindsight.

I think if that same fraction includes the same funds for decades, there's something they're doing right. Foresight would say if they do A,B, and C for decades and get great performance that there's a good chance (never a guarantee) that they'll continue -if- they keeping doing A,B, and C. That consistency holds true for crappy performance, too. Warren Buffett comes to mind - I'd sell BRK the moment he starts making some rapid changes in his money management methods. But as long as he stays true he'll likely (never a guarantee) continue to do well.

MDM

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Re: Does American Funds really beat the market?
« Reply #18 on: August 02, 2017, 04:01:40 PM »
[Some fraction of active funds will outperform comparable index funds over some time periods.  The difficulty is finding that fraction with foresight rather than hindsight.
I think if that same fraction includes the same funds for decades, there's something they're doing right. Foresight would say if they do A,B, and C for decades and get great performance that there's a good chance (never a guarantee) that they'll continue -if- they keeping doing A,B, and C. That consistency holds true for crappy performance, too. Warren Buffett comes to mind - I'd sell BRK the moment he starts making some rapid changes in his money management methods. But as long as he stays true he'll likely (never a guarantee) continue to do well.
Yes, Warren has done - and continues to do - well.  But one doesn't need many fingers to count those who have done similarly.  Compared with the thousands of funds available, as Dirty Harry liked to ask, "do you feel lucky?"

JLee

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Re: Does American Funds really beat the market?
« Reply #19 on: August 02, 2017, 04:44:02 PM »
I don't think 2.75% less is "much worse". Every one of them would have still handily beat the market by a large margin.

Then why aren't they being honest and transparent by providing data that's actually relevant?

arcyallen2

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Re: Does American Funds really beat the market?
« Reply #20 on: August 02, 2017, 05:11:51 PM »
I don't think 2.75% less is "much worse". Every one of them would have still handily beat the market by a large margin.

Then why aren't they being honest and transparent by providing data that's actually relevant?

They were being honest. They told you everything and even included the load that everyone thinks is evilly hidden deep in the dark heart of some Fee Monster. The "relevant data" would be 3.5% - the ACTUAL historical average people pay when investing in their funds due to breakpoints (quantity discounts). But then people would complain about -that-. No matter what they post, there will always be skeptics. That's fine.

Not being honest is repeating over and over again that active funds can't beat the index, or that specifically -these- funds have't beaten the index.

Let's get past the other issues for a moment so I can ask a question: In a non-argumentative fashion, can we talk about how a fund might beat the index for 40 or 80 years? I'd like honest thoughtful answers/discussion on this. I'm open to ideas that I don't currently think yet, so I'm interested in hearing people's opinions. (or maybe it should be a new thread)

ps- I believe the author of The Black Swan once said that statistically 7-8 managers will beat their indexes based on strict coin-flipping luck. THAT'S a scary fact!

JLee

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Re: Does American Funds really beat the market?
« Reply #21 on: August 02, 2017, 05:40:11 PM »
I don't think 2.75% less is "much worse". Every one of them would have still handily beat the market by a large margin.

Then why aren't they being honest and transparent by providing data that's actually relevant?

They were being honest. They told you everything and even included the load that everyone thinks is evilly hidden deep in the dark heart of some Fee Monster. The "relevant data" would be 3.5% - the ACTUAL historical average people pay when investing in their funds due to breakpoints (quantity discounts). But then people would complain about -that-. No matter what they post, there will always be skeptics. That's fine.

Not being honest is repeating over and over again that active funds can't beat the index, or that specifically -these- funds have't beaten the index.

Let's get past the other issues for a moment so I can ask a question: In a non-argumentative fashion, can we talk about how a fund might beat the index for 40 or 80 years? I'd like honest thoughtful answers/discussion on this. I'm open to ideas that I don't currently think yet, so I'm interested in hearing people's opinions. (or maybe it should be a new thread)

ps- I believe the author of The Black Swan once said that statistically 7-8 managers will beat their indexes based on strict coin-flipping luck. THAT'S a scary fact!

I'm not sure that's ever been claimed.

What has been claimed is that you can't predict which managed funds will continue to beat the index...and they are generally expensive enough to (often more than) offset the difference.

TomTX

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Re: Does American Funds really beat the market?
« Reply #22 on: August 02, 2017, 07:53:10 PM »
No.

Radagast

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Re: Does American Funds really beat the market?
« Reply #23 on: August 02, 2017, 11:27:27 PM »
After reviewing again, it does seem that on average American funds has beaten the market even after expenses and loads, etc. They even show sparks of outperformance relatively recently, and the funds seem well managed. Their strategy seems to be a mix of low volatility, "sin", and closet index with the latter increasing over time. I would not choose them if I had a choice, definitely not in a taxable account, and going forward they may have a hard time justifying their loads. If your employer retirement account has limited options then I think American Funds will be a fine choice going forward.

MDM

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Re: Does American Funds really beat the market?
« Reply #24 on: August 03, 2017, 12:06:06 AM »

Mighty-Dollar

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Re: Does American Funds really beat the market?
« Reply #25 on: August 03, 2017, 03:44:26 AM »
The stock market is much more efficient than it was back in 1988 when there was no Internet access for consumers. That's the slight of hand that America Funds pulled in this little "study" of theirs. And again with an R-squared rating of 93 they are merely copying their benchmark very closely so you're basically paying for a REALLY expensive index fund, which is pointless.

I don't even know if the S&P 500 index is the benchmark that this fund should be compared to. That could be yet another slight of hand that they are pulling.

beltim

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Re: Does American Funds really beat the market?
« Reply #26 on: August 03, 2017, 05:20:58 AM »
And again with an R-squared rating of 93 they are merely copying their benchmark very closely so you're basically paying for a REALLY expensive index fund, which is pointless.

R2 doesn't work like that.  If the portfolio returned twice as much as the index, but with the same daily movements in percentage, the R2 would be 1.  But the portfolio would have twice the annual return.

R2 says nothing about returns.

runewell

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Re: Does American Funds really beat the market?
« Reply #27 on: August 03, 2017, 09:57:43 AM »
And again with an R-squared rating of 93 they are merely copying their benchmark very closely so you're basically paying for a REALLY expensive index fund, which is pointless.

R2 doesn't work like that.  If the portfolio returned twice as much as the index, but with the same daily movements in percentage, the R2 would be 1.  But the portfolio would have twice the annual return.

R2 says nothing about returns.

You misunderstand what was meant.  With an R^2 of 93% the portfolios are so closely correlated that it is highly unlikely the one index could really beat the other, to say nothing of the return net of fees.

HeadedWest2029

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Re: Does American Funds really beat the market?
« Reply #28 on: August 03, 2017, 10:18:09 AM »
After reviewing again, it does seem that on average American funds has beaten the market even after expenses and loads, etc. They even show sparks of outperformance relatively recently, and the funds seem well managed. Their strategy seems to be a mix of low volatility, "sin", and closet index with the latter increasing over time. I would not choose them if I had a choice, definitely not in a taxable account, and going forward they may have a hard time justifying their loads. If your employer retirement account has limited options then I think American Funds will be a fine choice going forward.

What are you basing this on? The funds cherry picked in the ad or their entire portfolio starting 40 years ago because I'm not sure we have data on every failed American Funds actively managed fund.  If you have data to back that up, I'd be interested in reading that.  Of those funds that have outperformed, how many of those funds are still managed by the same people that created the early BETA which has carried them from early gains? Essentially you are betting on the fund managers, not American Funds.  As it was said earlier, a lot of the gains in early years is because fund companies had a significant competitive advantage in terms of information.  That advantage has significantly diminished so more and more they just mimic an index fund and hope no one notices.  I see that to an extent with international now.  I held on to actively managed international funds because performance seemed to justify it (perhaps again, information not freely available), but I feel that gap has closed too and now I'm totally indexed except one managed bond fund.

beltim

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Re: Does American Funds really beat the market?
« Reply #29 on: August 03, 2017, 11:40:49 AM »
And again with an R-squared rating of 93 they are merely copying their benchmark very closely so you're basically paying for a REALLY expensive index fund, which is pointless.

R2 doesn't work like that.  If the portfolio returned twice as much as the index, but with the same daily movements in percentage, the R2 would be 1.  But the portfolio would have twice the annual return.

R2 says nothing about returns.

You misunderstand what was meant.  With an R^2 of 93% the portfolios are so closely correlated that it is highly unlikely the one index could really beat the other, to say nothing of the return net of fees.

I understood exactly what was meant. What was meant was wrong. There is nothing in statistics or investing to support the claim.  Look at the 50 year correlation between Berkshire Hathaway and the S&P 500 for a real-world example.

uwp

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Re: Does American Funds really beat the market?
« Reply #30 on: August 03, 2017, 03:48:35 PM »

What are you basing this on? The funds cherry picked in the ad or their entire portfolio starting 40 years ago because I'm not sure we have data on every failed American Funds actively managed fund.

I don't think American Funds has ever closed a fund.

[Edit: I am not 100% sure on this.  But I am pretty sure.]
« Last Edit: August 03, 2017, 03:50:46 PM by uwp »