Vanguard Index vs American Funds?

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goose837
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Vanguard Index vs American Funds?

Post by goose837 » Sat Aug 16, 2014 1:21 am

I am planning on investing a lump sum on money in US Large Cap stocks and holding on to these investments for the next 20-30 years. After reading various books on investing, it seemed to me that low-cost index funds are the way to go. However, my investment adviser recommended the actively managed funds from American Funds.

American Funds has 7 funds that invest only in US Large Cap stocks. I did some research on the 30-year, 20-year, and 10-year real returns (after fees subtracted) of these funds vs. the Vanguard 500 Index Admiral (VFIAX).

Name of fund: 30-year annual return; 20-year annual return; 10-year annual return (all numbers include mutual fund fees)

Vanguard 500 Index Admiral (VFIAX): 11.1%; 9.4%; 8.5%

AMCAP (AMCPX): 11.4%; 10.4%; 9.1%
Growth Fund of America (AGTHX): 12.2%; 10.9%; 9.1%
The New Economy (ANEFX): 11.7%; 9.5%; 10.8%
American Mutual Fund (AMRMX): 10.7%; 9.2%; 8.1%
Fundamental Investors (ANCFX): 12.2%; 10.4%; 9.6%
The Investment Company of America (AIVSX): 11.5%; 9.7%; 8.2%
Washington Mutual Investors (AWSHX): 11.5%; 9.8%; 7.9%

With the exception of AMRMX, all these funds (even after their 0.6-0.8% expense ratio included) have outperformed the Vanguard SP 500 over the 30-year and 20-year periods, which is the time horizon that I am looking at. Over the past 10 years, half the funds have slightly underperformed the index fund (at most -0.6%) while the other half has outperformed the index fund by around 0.6-2.3%.

Any thoughts on choosing the Vanguard index vs the actively managed funds at American Funds? Thanks!

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Re: Vanguard Index vs American Funds?

Post by toto238 » Sat Aug 16, 2014 2:18 am

How many American funds existed over the past 30 years that were spun off, closed or merged due to poor performance? This is called survivor bias.

Whoever was in charge of their funds 30 years ago is likely retired and/or dead today, so basically you have an entirely new team of fund managers. Any strategy that the old fund advisors used to "beat the market" has likely been figured out by the competition and has this been priced in and become worthless.

"Past performance is not a guarantee of future performance."

Basically you've got a whole new team of advisors running what might as well be a brand new fund, forced to find all new strategies. Could they outperform the next 30 years? Yes. Will they? Probably not.

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Re: Vanguard Index vs American Funds?

Post by in_reality » Sat Aug 16, 2014 4:04 am

goose837 wrote:
With the exception of AMRMX, all these funds (even after their 0.6-0.8% expense ratio included) have outperformed the Vanguard SP 500 over the 30-year and 20-year periods, which is the time horizon that I am looking at. Over the past 10 years, half the funds have slightly underperformed the index fund (at most -0.6%) while the other half has outperformed the index fund by around 0.6-2.3%.

Any thoughts on choosing the Vanguard index vs the actively managed funds at American Funds? Thanks!


#1 Did you account for the load? It's not figured in those growth charts. Multiply returns by 1- load percent for how much you'd really have gotten.

#2 What would you be paying the advisor? I think the mechanism is the advisor gets a cut and that's why they steer you there.

#3 past results != future returns.

Let's take AGTHX. It's a huge fund even after suffering $93 billion outflows in the last 5 years. It's huge and they can't effectively do mid strategies because it's too big. When it was smaller, it had 25% of small/mid caps. Now it's 14%.

ANEFX is difficult to compare. At 10% emerging markets and a much higher allocation to mid/small caps, I'm not sure what to compare it to.

I've been watching American funds GFAFX (which is AGTHX but no load) and thinking "do I really expect the next management team to be able to outperform"? It's changing ...

Anyway, what does your advisor say about tax efficiency? Vanguard mutual funds often have a dual share structure so they have similar benefits as an ETF. Are these funds going in taxable? Looking at http://performance.morningstar.com/fund ... ture=en-US and comparing GFAFX (AGTHX) to VTI or VTSAX (Vanguard total market), for the past 10 years -- it seems clear to me that I should sell my GFAFX, pay the capital gains and reinvest in something total market.

And why only large cap?

Code: Select all

  Tax Cost Ratio   —    1       3         5      10      15 years                                
AGTHX   —   —   —   —   1.59   0.67     0.51   0.54    0.70   —
VTSAX   —   —   —   —   0.80   0.51     0.42   0.37    —   —
VTI   —   —   —   —     0.80   0.51     0.42   0.37    —   —
VFINX   —   —   —   —   0.79   0.49     0.41   0.37    0.39   


Bottom line:
American Funds don't make sense because of:
load + higher ER + higher tax + manager risk + (possible advisor fee)

http://www.cbsnews.com/news/american-fu ... add-value/

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Re: Vanguard Index vs American Funds?

Post by goose837 » Sat Aug 16, 2014 9:59 am

Thank you for taking the time to reply! I appreciate your advice.

#1 Did you account for the load? It's not figured in those growth charts. Multiply returns by 1- load percent for how much you'd really have gotten.

#2 What would you be paying the advisor? I think the mechanism is the advisor gets a cut and that's why they steer you there.

#3 past results != future returns.


#1 Because of the amount of money I will be investing (>1 million), there will be no load fee (0%) for purchasing Class A shares.

#2 My financial adviser will get a 1% commission from American funds. Fortunately, this commission is paid by American funds and will NOT come from my own money. Other than the fund expense ratio (0.6%-0.8%), I will be paying no other investment fees.

#3 I understand that past results are no guarantee of future returns. But if a fund or group of funds is able to consistently beat an index (fees included) over 10, 20, and 30-year rolling periods, would it be reasonable to say that it has a good chance of beating the index in the future given that the management structure and incentives remain the same? In much the same way, if an index fund outperforms most of it's peers over multiple rolling periods, would it be safe to say it has a good chance of continuing to do so in the future?

In terms of tax efficiency, all the money I will be investing is in my IRA.

I would like to focus on blue chip dividend-paying stocks because I will be retiring within the next decade or so, and it seems to me that even though small cap and international stocks may have greater returns, they tend to me more volatile.

How many American funds existed over the past 30 years that were spun off, closed or merged due to poor performance? This is called survivor bias.


You make an excellent point regarding survivorship bias. Surprisingly enough, it looks to me like American funds has not closed, merged, or even opened a new US Large Cap mutual fund for over 30 years.

Any thoughts? I really appreciate your feedback on this matter.

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Re: Vanguard Index vs American Funds?

Post by grabiner » Sat Aug 16, 2014 10:21 am

Is this a taxable investment? If it is, then you have to reduce your returns the IRS takes out, and the actively-managed American funds have an extra cost. Checking data from Morningstar, I would expect that to be about 0.7% for a growth fund, 1% for a blend fund, 1.2% for a value fund. With an Index fund (Vanguard or otherwise), it would be 0.2% for a growth fund, 0.3% for a blend fund, 0.5% for a value fund. (Value funds have higher tax costs because they have higher dividend yields).

After adjusting for the taxes, American Funds have lost their small advantage over the indexes. And the tax cost is almost guaranteed, as active funds, by their nature, buy and sell stocks and incur capital gains when they sell. In contrast, there is no particular reason to expect that stock-picking skill will be reproducible, nor differences between market segments (AMCAP, for example, has more mid-caps and small-caps than the S&P 500 index, and if you compare it to Vanguard Total Stock Market Index instead, the 0.6% return difference over the last ten years vanishes).

This recommendation has nothing to do with American Funds; I don't like Vanguard's active funds in a taxable acocunt either.
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goose837
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Re: Vanguard Index vs American Funds?

Post by goose837 » Sat Aug 16, 2014 11:06 am

Is this a taxable investment?


All the money is in a traditional IRA, so I will not pay taxes on it until I take distributions. When I do take distributions, it will be taxed as ordinary income regardless of how it was invested.

Thanks for your advice! Any more thoughts would be very much appreciated

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Re: Vanguard Index vs American Funds?

Post by villars » Sat Aug 16, 2014 12:06 pm

Why not split the difference and have 1/2 in AF and the other indexed? This way you ll find out which turned out better.

Honestly, I think that within the same asset class, this will not make a huge difference.

In my case, I have only American Funds in my 401k. I have my stock allocation there in AGTHX .
In my taxable I use VTSAX (total market admiral). Every time I have checked my portfolio , those 2 funds have moved in synch. I think how much you allocate to bonds is really the more important question.

If the advisor is a friend, I say use some American Funds to keep him/her happy. You may come slightly ahead or slightly behind.

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Re: Vanguard Index vs American Funds?

Post by nisiprius » Sat Aug 16, 2014 12:57 pm

This is important to know, even though it doesn't directly address the question: how are you paying your advisor? He has to make a living somehow, who pays him and how?

He may have a conflict of interest. If you are paying him directly, i.e. he sends you a bill for his services, he may be neutral.

American Funds are, however, often sold by advisors who are paid through the load or "sales charge." That is, American Funds pays him for the time he takes working with clients, and so do other "load" funds. Vanguard, and other "no-load" funds, do not.

Has your advisor recommended ANY no-load funds from any mutual fund company at all?

He may sincerely feel that American Funds are excellent funds and that he can recommend them without hesitation, and he may really believe they are better than index funds--but if he is losing money if you choose Vanguard instead of American funds, you need to know that.
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Re: Vanguard Index vs American Funds?

Post by pkcrafter » Sat Aug 16, 2014 1:56 pm

goose is correct, there are no loads with >1M in assets. Goose, just be aware of this:
There is no initial sales charge on purchases of $1 million or more. A 1% contingent deferred sales charge (CDSC) may be assessed if a redemption occurs within one year of purchase.


https://www.americanfunds.com/funds/classes/details.html
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Re: Vanguard Index vs American Funds?

Post by dickenjb » Sat Aug 16, 2014 5:27 pm

goose837 wrote:... my investment adviser recommended the actively managed funds from American Funds.



Of course he did. He gets paid to put you into those funds.

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Re: Vanguard Index vs American Funds?

Post by JoshCine » Sat Aug 16, 2014 5:44 pm

I moved out of American Funds, and am moving into Vanguard Passive funds.

I may be young and have not much experience, but I felt my financial advisor with American Funds was always pushing me into funds he would make money via a front end load, regardless of what was right. Besides, 5.75% for ME (I DONT have a million bucks to invest) plus the yearly fee ate away too much.

Yes, the fund did amazing for a good while, but that was before the fund got so large, that I feel it'll never do that good again. But even discounting that, like others have said, its a different management group now, and it will be a different management group later.

I'm personally working on building a Vanguard portfolio at the moment, I suggest looking into them.

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Re: Vanguard Index vs American Funds?

Post by in_reality » Sat Aug 16, 2014 5:56 pm

goose837 wrote:But if a fund or group of funds is able to consistently beat an index (fees included) over 10, 20, and 30-year rolling periods, would it be reasonable to say that it has a good chance of beating the index in the future given that the management structure and incentives remain the same? In much the same way, if an index fund outperforms most of it's peers over multiple rolling periods, would it be safe to say it has a good chance of continuing to do so in the future?


You are free to take risk however you want, but no I don't think so.

The strategies employed in the past were different and the managers are different for AF. For the index funds, the strategy is the same and managers mostly irrelevant.

I would like to focus on blue chip dividend-paying stocks


Do they have a fund that does that. It seems like managers kinda go wherever they think the opportunity is.

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Re: Vanguard Index vs American Funds?

Post by Johm221122 » Sat Aug 16, 2014 6:15 pm

I would not compare those funds with S&P 500 index but with Total Market indexes.That being said why do you need to look at seven funds if you want to invest in large dividend paying US stocks.Have you read the WIKI
http://www.bogleheads.org/wiki/Three-fund_portfolio


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Re: Vanguard Index vs American Funds?

Post by Steelersfan » Sat Aug 16, 2014 6:37 pm

I'm familiar with one of those funds since I held it from the early 2000's until about two years ago, and that's Fundamental investors.

First of all it does invest in non-U.S. equities:

U.S. Equities 82.7%
Non-U.S. Equities 13.2%
Cash & Equivalents 4.1%

And from the prospectus of that fund:

"The fund seeks to invest primarily in common stocks of companies that appear to offer superior opportunities for capital growth and most of which have a history of paying dividends. In addition, the fund may invest significantly in securities of issuers domiciled outside the United States."


When I first bought it I was completely unaware that it held something like 30% non-U.S. equities. That was a period of time when those stocks did especially well against the S&P 500, thus I was very pleased with my returns. But the extra gain was due to the investments in non-U.S. equities. That performance boost is still embedded in the 10 year and longer returns.

I suggest you add a 5 year return column to your analysis and also see how they're fared over that time period.

I don't know if you get a break on the Expense Ratio (ER) for large investment like you do with the load fee (I don't with my 6 figure investment there) but the ER's at American Funds are in the range of .60% while Vanguard's are in the .10% range. For $1,000,000 that comes to to $5,000 a year.

Don't get me wrong, American Funds has good funds and it's a well run company. I just wish I had all of my money are Vanguard solely for the difference in ER's.


p.s. I checked several of the other funds on your list and they all too invest in non-U.S. equities, usually in the range of 10%. You'll have to read their prospectuses to see what, if any, limits they have for the future.

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Re: Vanguard Index vs American Funds?

Post by simpleton » Sun Aug 17, 2014 3:53 pm

Here's a counter-intuitive proposition: I would feel a lot more confident investing with American Funds if they were a mediocre mutual fund company. However, American Funds has just about the best performance record of any actively managed fund company over the past 20+ years.

You should find that fact terrifying.

They were the best of the best, and yet the still just barely eked out a slight lead over the total market index. And even that is only because of their fabulously wonderful handling of the 2000 tech crash.

Here's the reversion to the mean chart comparing an equal basket of the seven American funds you listed to the Vanguard Total Market Fund (VTSMX) from 1992 to the present. This would be great news for active management if this is what the average actively managed fund company produced over that time period. But to retrospectively single out the "best of the best" fund company and have only this middling advantage over the total market index, it should make you rethink the entire enterprise of trying to prospectively select the best active management fund company for the next 20-30 years.


http://morning-wave-7809.herokuapp.com/ ... wshx/vtsmx
Image


I am sure your advisor will strenuously disagree with all this. His business model is to maintain the fiction that he is charging you nothing while collecting large kickbacks from American Funds for steering your business to their over-priced funds. As Upton Sinclair said, "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

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Re: Vanguard Index vs American Funds?

Post by retiredjg » Sun Aug 17, 2014 4:04 pm

goose837 wrote:American Funds has 7 funds that invest only in US Large Cap stocks.

Why do you think this? Most American funds contain foreign stock as well (including the ones I checked from your list). So you are comparing apples to oranges. Do you know how to find out what is in these funds?

I don't want to be too nosy, but how do you get $1 million in a tIRA? Even if it is a rollover IRA or a 3rd generation inherited IRA, I don't see how you could get that much money in there.

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Re: Vanguard Index vs American Funds?

Post by Toons » Sun Aug 17, 2014 7:05 pm

American has done very well over decades,a well respected firm,matter of fact I have held Investment Company Of America for a couple decades,no complaints with performance.When I look at the difference in expense ratios Vanguard vs American fund,and compound that difference over decades of time, I just see "lost opportunity" as more shares will compound for you with Vanguard and given your asset base it could be quite substantial,just saying,either way American or Vanguard you will do well. :happy :happy

https://personal.vanguard.com/us/funds/ ... tingFrom=2
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Re: Vanguard Index vs American Funds?

Post by ThePrune » Sun Aug 17, 2014 7:32 pm

goose837 wrote:I am planning on investing a lump sum on money in US Large Cap stocks and holding on to these investments for the next 20-30 years. After reading various books on investing, it seemed to me that low-cost index funds are the way to go. However, my investment adviser recommended the actively managed funds from American Funds.
Any thoughts on choosing the Vanguard index vs the actively managed funds at American Funds? Thanks!

I anticipate that you will be placed into either Class A Shares or into Class C Shares. Chances are your financial advisor hasn't even mentioned the distinction! But both share classes include an annual cost to you (referred to as 12b-1 fees) which represents your money that will be deducted from your investments and sent back to your financial advisor as a reward for placing you into those American Funds.

If they place you in A Shares, you will lose about 0.25% per year (i.e. $2,500 annually on a million dollar investment) in 12b-1 fees.
If they place you in C Shares, you will lose about 1.00% per year (i.e. $10,000 annually on a million dollar investment) in 12b-1 fees.

It makes a BIG difference if your advisor intends to place you in C shares, doesn't it? And these 12b-1 fees are ON TOP OF annual management fees and administrative fees.

At least at the million dollar breakpoint you no longer have to pay "front-load" on the investment.

At Vanguard there are never front loads or 12b-1 fees. And your annual management and administration fees will be lower than for American Funds.
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Re: Vanguard Index vs American Funds?

Post by grabiner » Sun Aug 17, 2014 7:50 pm

nisiprius wrote:This is important to know, even though it doesn't directly address the question: how are you paying your advisor? He has to make a living somehow, who pays him and how?

He may have a conflict of interest. If you are paying him directly, i.e. he sends you a bill for his services, he may be neutral.

American Funds are, however, often sold by advisors who are paid through the load or "sales charge." That is, American Funds pays him for the time he takes working with clients, and so do other "load" funds. Vanguard, and other "no-load" funds, do not.


And even without the 5.75% load, the advisor may be paid for recommending American funds; the A shares charge a 12b(1) fee of 0.25% per year. If you hold the fund for 20 years, 5% of your investment goes to compensate advisors (not entirely yours, who probably gets a fixed amount when you invest).
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Re: Vanguard Index vs American Funds?

Post by ThePrune » Sun Aug 17, 2014 7:52 pm

goose837 wrote:American Funds has 7 funds that invest only in US Large Cap stocks. I did some research on the 30-year, 20-year, and 10-year real returns (after fees subtracted) of these funds vs. the Vanguard 500 Index Admiral (VFIAX).

Strictly speaking it isn't correct to compare most American Funds large cap mutual funds against an S&P 500 index fund. This has to do with a topic called "factor analysis". But about a year ago American Funds released a white paper performing just such a large cap comparison and used it to infer their long-term performance superiority. I started a posting thread about that white paper last year: American Funds' Active Investing White Paper.

Earlier this month Robert T posted onto my thread a detailed "factor analysis" on the American Funds large cap mutual funds: Robert T's factor analysis posting. His analysis showed that when you included more than just a comparison against the S&P 500 index, that the only American Fund that showed any evidence of superior investment performance was the Growth Fund of America. And even for this fund the degree of outperformance was low enough that it could be due to randomness / pure chance.

As others have already mentioned, the American Funds mutual funds did quite well in the 2000-2002 recession - mainly because they tend to lean toward "value stocks" and avoided the dot.com internet stocks that crashed so badly. And I'm very glad about that, because I wasn't a Boglehead at that time and had most of my family investments in American Funds mutual funds! But before the 2008-2009 recession I had become a Boglehead and switched my money into low-cost index funds at Fidelity and Vanguard. As it turns out the American Funds mutual funds did very poorly in the 2008-2009 market drop. That underperformance was a major cause for the massive outflow of investor funds from American Funds after 2009.

But I will say this: If someone absolutely had to use actively invested mutual funds and American Funds were among their options, I'd have no hesitancy to recommend them.
Last edited by ThePrune on Sun Aug 17, 2014 8:34 pm, edited 1 time in total.
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Re: Vanguard Index vs American Funds?

Post by in_reality » Sun Aug 17, 2014 8:01 pm

retiredjg wrote:I don't want to be too nosy, but how do you get $1 million in a tIRA? Even if it is a rollover IRA or a 3rd generation inherited IRA, I don't see how you could get that much money in there.


It's called the beauty of a 401 plan at work.

So maybe American Funds are the best in terms of active management. Maybe they might be slightly better than the index. My biggest concern is that we'll reach a super high P/E10 and returns will be low for some years. In that case, I don't really see how American Funds will do well.

If you are interested in blue chip dividend paying companies, there are many ETFs targeting this area. Vanguard also has actively managed offerings (VDIGX - for instance).

Playing around I threw together 40% large cap Dividend, 40% total stock market, 20% international large cap Dividend -- looks awesome. I'd take the low ER of that and ditch the worries of active management style creep. Well, I'm not into dividend focused funds but the point is you should be able to target you desired AA.

Maybe you should get a fee only advisor and see what they say ... someone who isn't going to get payment from American Funds.

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Re: Vanguard Index vs American Funds?

Post by tibbitts » Sun Aug 17, 2014 9:22 pm

I think it would be fine to invest in an assortment of AF products, at 0% sales charge, and a net .6% or so expense ratio (including 12b-1 fee, etc.) But don't you need $1MM in each fund to waive sales charges, not just $1MM total?

Realistically, it seems that an assortment of effectively-no-load AF vs. index funds is likely to produce similar results over time.

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Re: Vanguard Index vs American Funds?

Post by ThePrune » Mon Aug 18, 2014 6:03 am

tibbitts wrote: But don't you need $1MM in each fund to waive sales charges, not just $1MM total?

No, American Funds calculates breakpoints for front-load sales charge reductions based on total investments across all mutual funds within the American Funds family.
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Re: Vanguard Index vs American Funds?

Post by ASUGrad » Mon Aug 18, 2014 10:09 am

#3 I understand that past results are no guarantee of future returns. But if a fund or group of funds is able to consistently beat an index (fees included) over 10, 20, and 30-year rolling periods, would it be reasonable to say that it has a good chance of beating the index in the future given that the management structure and incentives remain the same? In much the same way, if an index fund outperforms most of it's peers over multiple rolling periods, would it be safe to say it has a good chance of continuing to do so in the future?


No its not safe to say that....

1# Fidelity Magellan fund. Outperformed for a long time... then it didn't for a long time.

2# Look at the 5, 3, and 1 year performance. Most of the funds listed above underperformed over those time periods. So the trend might very well be reversing already. AFs are also known for having a lot of overlap which is a big reason so many move in sink. Just looking at top holdings I see Amazon, Biogen, Boeing, and Microsoft repeated several times.

3# Note American Funds has had more money going out than coming in for awhile, and their market share is shrinking fast. That means economies of scale are likely shrinking as well. Will they be able to keep talented professionals($$$) & keep the expense ratios from rising? Probably isn't a consideration over the short term, but over the next 30 years? The switch from commissioned brokers to fee based planners will likely compound this problem as AF gets most of their business from the former, and the later prefers low cost alternatives... something AF has yet to indorse.

(Image from morningstar.)
Image
Image

4# American Funds don't have real benchmarks. Their domestic stock funds keep lots of money in cash and foreign securities so a domestic stock fund might only have 80% in domestic stocks. Makes it hard to compare to something else. This fact also means AFs will normally slightly outperform when international is better than domestic, and slightly underperform when the opposite it true. Actually you'll notice international did better between 2002-2008, and domestic has done better since. Might be a big reason that the listed funds did better over 10 year than the 500 index, but worse over the last 5 :wink: .

Image


My biggest problem with this situation isn't even the American Funds. Of the loaded active funds out there they are probably some of the best, but that isn't saying much. My problem is that you are using a broker. Of all the options available in the investing universe he is only going to recommend options that pay him first. You lucked out that there are no commissions in this situation other than the high ERs. Now in order to get the 0% load he has to put everything in American funds. Ok well a few of their stock funds have good performance, but what about their bond funds, international funds, etc.? There is also the fact that all the funds listed have a tiny bit of international and cash in them which is a rebalancing nightmare. If you met with a flat fee certified financial planner would they also have recommended the above American Funds? Probably not.

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Re: Vanguard Index vs American Funds?

Post by leonard » Mon Aug 18, 2014 12:35 pm

Use index funds.
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Re: Vanguard Index vs American Funds?

Post by Grt2bOutdoors » Mon Aug 18, 2014 12:47 pm

The smart money invests in index funds.
Warren Buffett is instructing his estate to invest in the S&P 500 - an index fund.
Public and private sector pension funds utilize indexed investments in obtaining the returns necessary to meet their payment obligations.

In all of the above instances, I've never heard or seen one of those individuals or entities directly or indirectly state "I invest my money in the American Funds" or "in actively managed mutual funds charging an expense ratio of 60-80 bps annually". Have you? Food for thought.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Steelersfan
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Re: Vanguard Index vs American Funds?

Post by Steelersfan » Mon Aug 18, 2014 1:18 pm

ASUGrad wrote:Actually you'll notice international did better between 2002-2008, and domestic has done better since. Might be a big reason that the listed funds did better over 10 year than the 500 index, but worse over the last 5 :wink: .


Your graph perfectly explains why the American Funds' fund I was in (Fundamental Investors) did better than my S&P 500 fund. I happen to have my annual report from 2007. They had exactly 30% of the fund invested internationally.

Smart move? Or lucky?

If you think smart, then since 2008 they've been dumb, as measured by their actual results.

If you think lucky, then since 2008 they've been unlucky.

Are they going to get smart or lucky again to outperform the S&P 500? And if so, when?

ASUGrad
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Re: Vanguard Index vs American Funds?

Post by ASUGrad » Mon Aug 18, 2014 1:50 pm

Steelersfan wrote:
ASUGrad wrote:Actually you'll notice international did better between 2002-2008, and domestic has done better since. Might be a big reason that the listed funds did better over 10 year than the 500 index, but worse over the last 5 :wink: .


Your graph perfectly explains why the American Funds' fund I was in (Fundamental Investors) did better than my S&P 500 fund. I happen to have my annual report from 2007. They had exactly 30% of the fund invested internationally.

Smart move? Or lucky?

If you think smart, then since 2008 they've been dumb, as measured by their actual results.

If you think lucky, then since 2008 they've been unlucky.

Are they going to get smart or lucky again to outperform the S&P 500? And if so, when?


I think American funds likes to load up their domestic equity funds with international stocks. I don't think its luck because they always do it. Sometimes it pays off, sometimes not so much. I don't think loading a domestic equity fund with international is 'smart,' and it sure isn't smart when it happens to outperform an actual domestic equity fund. Apples, oranges.

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Steelersfan
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Re: Vanguard Index vs American Funds?

Post by Steelersfan » Mon Aug 18, 2014 4:32 pm

ASUGrad wrote:
I think American funds likes to load up their domestic equity funds with international stocks. I don't think its luck because they always do it. Sometimes it pays off, sometimes not so much. I don't think loading a domestic equity fund with international is 'smart,' and it sure isn't smart when it happens to outperform an actual domestic equity fund. Apples, oranges.


I agree.

At least for the two time periods I looked at (2007 and today) they have gone from 30% international to 10% international so they do change. I don't know when they changed their allocation since 2007, or how many times.

BTW - When I was investing in Fundamental Investors (early to later 2000's), their "Investment objective, strategies and risks" section said they limit their holdings in international equities to 30%, which is the level they were at. I looked at their current statement and they place no limit on how much they can hold, only "the fund may invest significantly in securities of issuers domiciled outside the United States."

goose837
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Re: Vanguard Index vs American Funds?

Post by goose837 » Tue Aug 19, 2014 12:03 am

Thank you for all your responses. It has definitely been very enlightening reading through your posts.

I anticipate that you will be placed into either Class A Shares or into Class C Shares. Chances are your financial advisor hasn't even mentioned the distinction! But both share classes include an annual cost to you (referred to as 12b-1 fees) which represents your money that will be deducted from your investments and sent back to your financial advisor as a reward for placing you into those American Funds.


My adviser specified that he would only recommend me investing with American Funds if I purchase Class A shares. He explained that net expense ratios for Class A shares are about 0.6% while Class C shares are 1.5% for their US equity funds.

From a historical perspective, if I had invested in Class C shares during 10, 20, or 30-year rolling periods for the last 4 decades, my returns would have been nearly identical to, or even slightly worse, than a composite index (a comparable combination of a domestic and international equity indices).

In terms of how much my adviser will be compensated, he will earn a 1% commission on sale of the mutual funds (which will come from American funds and not my own account, given that I don't sell my shares in less than a year). He will also receive approximately 0.25% in 12b-1 fees each year, which is already included in the 0.6% expense ratio. However, there will be no fees on top of the net expense ratio.

If I had to pay a 5% load fee every time I made a contribution or pay the high EF of class C shares, investing in 2 or 3 low-cost index funds would clearly be a better choice. But given the opportunity to avoid a load fee, and invest in a handful of actively managed funds that have consistently beat their comparative indices (including fees) over long term rolling periods (10, 20, and 30 year periods) and have managed to have more stable returns over these same periods, the choice becomes much more difficult.

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Re: Vanguard Index vs American Funds?

Post by bnes » Tue Aug 19, 2014 12:36 am

goose837 wrote:If I had to pay a 5% load fee every time I made a contribution or pay the high EF of class C shares, investing in 2 or 3 low-cost index funds would clearly be a better choice. But given the opportunity to avoid a load fee, and invest in a handful of actively managed funds that have consistently beat their comparative indices (including fees) over long term rolling periods (10, 20, and 30 year periods) and have managed to have more stable returns over these same periods, the choice becomes much more difficult.


I have the same quandary, however it's related to keeping American Funds:

  1. For existing shares, the sales load is already water under the bridge.
  2. Past performance has been "good".
  3. Future investments are at .45% expense ratio (For American Funds New Perspective Class R6 RNPGX), with no load or 12b-1 fees.
It really comes down to this: will AF's computers do a better job of trading than other market participants, moving forward?

-----------------
Note there's a way to reduce the American Fund's sales load, which I taught the adviser:
Invest cash in the short term bond fund at 2.50%. Now re-balance into a 5.75% fund,
and no extra fee applies.

retiredjg
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Re: Vanguard Index vs American Funds?

Post by retiredjg » Tue Aug 19, 2014 7:26 am

goose837 wrote:But given the opportunity to avoid a load fee, and invest in a handful of actively managed funds that have consistently beat their comparative indices (including fees) over long term rolling periods (10, 20, and 30 year periods) and have managed to have more stable returns over these same periods, the choice becomes much more difficult.

Don't be too swayed by this. What they have chosen as a comparative index is not the same as a comparative investment.

Some people see this an intentional obfuscation, but I'm not sure that is true. There are no indexes that I know of that hold a similar investment mix to the American funds. And the investment mixes are subject to change anyway since the funds are actively managed. So maybe they just pick a yardstick like the 500 Index to have a consistent thing to compare to. That makes sense to me.

But using that comparison to conclude that the American Funds outperform index funds is faulty logic.

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oldzey
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Re: Vanguard Index vs American Funds?

Post by oldzey » Tue Aug 19, 2014 7:38 am

goose837 wrote:I am planning on investing a lump sum on money in US Large Cap stocks and holding on to these investments for the next 20-30 years. After reading various books on investing, it seemed to me that low-cost index funds are the way to go. However, my investment adviser recommended the actively managed funds from American Funds.
[snip]
Any thoughts on choosing the Vanguard index vs the actively managed funds at American Funds? Thanks!


Vanguard index funds (or ETFs) - Total U.S. Stock Market, and if you want international exposure, you might consider adding Total International Stock Market. Add a Vanguard Total Bond Market Fund if you need some fixed income.
Choose those Vanguard funds and then stay the course! Simplicity! :D
"The broker said the stock was 'poised to move.' Silly me, I thought he meant up." ― Randy Thurman

tibbitts
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Re: Vanguard Index vs American Funds?

Post by tibbitts » Tue Aug 19, 2014 8:01 am

I don't understand what everyone is arguing so vehemently about. Given that the OP can invest in American Funds for no sales charge and only the expense ratio, what's the problem? Many of us pay a similar expense ratio, even when investing in some Vanguard active funds, and often when investing through an employer plan. Didn't Bogle describe American Funds as being one of the best fund families in one of his books? As for changing allocation with funds over time, I'm not seeing where American Funds is any more guilty of this than Vanguard.

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Re: Vanguard Index vs American Funds?

Post by Saphomd » Sun Dec 25, 2016 10:13 am

[quote="tibbitts"]I don't understand what everyone is arguing so vehemently about.

I dont either. All I know is, if American funds is included in your retirement plan, then there is no load fee. Also the ER will be lower than the other share classes (non-retirement plan).

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Re: Vanguard Index vs American Funds?

Post by retiredjg » Sun Dec 25, 2016 11:23 am

Saphomd wrote:All I know is, if American funds is included in your retirement plan, then there is no load fee. Also the ER will be lower than the other share classes (non-retirement plan).

I'm not sure that either of those things are true.

Some plans (403b come to mind) do NOT waive the load. It seems that most 401k plans do. And the share class will depend entirely on the plan - it may not be cheaper at all.

In this (very old thread), the poster is talking about an IRA - as far as I know, there would be a load. That's what makes the American Funds unattractive.

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Re: Vanguard Index vs American Funds?

Post by retiredjg » Sun Dec 25, 2016 11:26 am

But under the new fiduciary rules, I suppose the American funds might not have a load inside an IRA. Instead there would be an AUM charge. I guess. I think some of this remains to be seen and might differ depending on who the salesperson is.

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Re: Vanguard Index vs American Funds?

Post by Saphomd » Sun Dec 25, 2016 11:39 am

In my 403(b) plan, there are three new Funds:

American funds american balanced R6 ---RLBGX
American funds WM R6---------------------RWMGX
American funds AMCAP R6-----------------RAFGX

I believe in the Class A series, they have a front load fee and higher ER. The load fee is waived in the 403(b) according to what I read online. However, I will call and find out for sure.

retiredjg
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Re: Vanguard Index vs American Funds?

Post by retiredjg » Sun Dec 25, 2016 11:55 am

All I'm saying is that plans differ. Your plan documents should tell you what your plan does.

It seems that 401k plans are more likely to waive the load than 403b plans. And SEP or SIMPLE IRA - always a load so far. Not sure what the new rules will do.

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yatesd
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Re: Vanguard Index vs American Funds?

Post by yatesd » Sun Dec 25, 2016 12:28 pm

Everyone else has provided great considerations...my biggest concern would be comparing apples to apples. Risk adjusted return compared to the exact same category. This has two components:

Same category: Value, Growth, International, actual mix, etc.
Assumed Risk: small stocks vs. large stocks, emerging vs. US, short term bonds vs. long term bonds

I assume something like the Sharpe ratio could be utilized to help in this area. For example, AGTHX has a Sharpe ratio of .76 vs .85 for the S&P 500. So AGTHX is comparatively more risky and should provide higher returns to obtain similar value.

marcos123
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Re: Vanguard Index vs American Funds?

Post by marcos123 » Sun Dec 25, 2016 1:10 pm

bnes wrote:Note there's a way to reduce the American Fund's sales load, which I taught the adviser:
Invest cash in the short term bond fund at 2.50%. Now re-balance into a 5.75% fund,
and no extra fee applies.


This^^^^.

If one happens to invest in AF A shares (and has less than $1MM in a taxable account): no reason to ever pay a higher load than 2.50%.

However, the new F3 share class will apparently be load-free.
Last edited by marcos123 on Sun Dec 25, 2016 1:28 pm, edited 1 time in total.

marcos123
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Re: Vanguard Index vs American Funds?

Post by marcos123 » Sun Dec 25, 2016 1:17 pm

In a recent post Larry Swedroe had the following to say about AF:

larryswedroe wrote:
....American is very disciplined in sticking with their asset classes, no style drift, and low turnover and relatively low costs. So in some ways closer to passive than many active funds. Also don't rely on "star managers"--- and of course, like DFA and other well run passie shops they can avoid the negatives of pure indexing, including front running and forced trading and inclusion of all securities even when research shows they are best excluded (like lottery tickets). I used to own American funds before I became aware of DFA, for all these reasons.

Larry


From this thread: viewtopic.php?f=10&t=205360
Last edited by marcos123 on Sun Dec 25, 2016 2:00 pm, edited 1 time in total.

BigJohn
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Re: Vanguard Index vs American Funds?

Post by BigJohn » Sun Dec 25, 2016 1:40 pm

Another good article by Larry Swedroe here https://www.bogleheads.org/forum/viewtopic.php?p=3159733.

In the intro he has some data about why performance from 20+ years ago is not very meaningful today. He then goes on to give additional reasons why active management is not likely to be a good choice.

supernova
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Re: Vanguard Index vs American Funds?

Post by supernova » Sun Dec 25, 2016 2:11 pm

dickenjb wrote:
goose837 wrote:... my investment adviser recommended the actively managed funds from American Funds.



Of course he did. He gets paid to put you into those funds.


You read my mind

nyknicks2544
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Re: Vanguard Index vs American Funds?

Post by nyknicks2544 » Sun Dec 25, 2016 5:30 pm

I am curious where this financial advisor is making his money?

His ongoing advice isn't free and a one-time payment from the American Funds investment you make isn't going to cut it. He won't be providing ongoing advice for 30+ years while letting you hold one fund indefinitely.

Miriam2
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Re: Vanguard Index vs American Funds?

Post by Miriam2 » Sun Dec 25, 2016 5:52 pm

FWIW - This thread is from August 2014, and OP has not posted anything since August 19, 2014.

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