American Funds Propaganda. Help me understand.

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fortfun
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American Funds Propaganda. Help me understand.

Post by fortfun » Wed May 15, 2019 10:41 am

The 403b salesman followed up my, "No thank you" email with another PDF. He was certain this was proof that American Funds beat the index. Notice that in his PDF, the AF performance, over the past 10 years looks amazing. However, if you look at my Morningstar chart, the performance of the AF funds have been dismal, over the past 10 years. So, I'm assuming the AF funds had some exceptional years back in their early days and due to this, along with compounding interest, AF is able to create these amazing looking results. Is this correct? If so, was it easier to beat the index in the early days of the S&P? Also, the Morningstar chart makes AF look like a down right awful choice, yes? Evidently, their stock picking has been poor the last 10 years, yes? If a person had DCAed during this entire period, VTSAX would have beat out their managed funds, yes?

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Re: American Funds Propaganda. Help me understand.

Post by mhalley » Wed May 15, 2019 11:02 am

Many funds start out great initially. A main reason for this is that with little money to invest, the manager can pick stocks more effeciently. If he has many millions to invest, his choices are more limited. In addition, information was not as widely available in ancient times as it is today, so there was some advantage for active management.
Bogleheads do not believe that there are no mutual funds that outperform, just that it is extremely difficult to pick them, and that over time, passive low cost investing is more likely to let us reach our goals. Eventually mutual funds that outperform will revert to the mean, as per the 10 year returns in the chart.
Last edited by mhalley on Wed May 15, 2019 5:53 pm, edited 1 time in total.

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Re: American Funds Propaganda. Help me understand.

Post by fortfun » Wed May 15, 2019 11:20 am

mhalley wrote:
Wed May 15, 2019 11:02 am
Many funds start out great initially. A main reason for this is that with little money to invest, the manager can pick stocks more effeciently. If he has many millions to invest, his choices are more limited. In addition, information was not as widely available in ancient times as it is today, so there was some advantage for active management.
Bogleheads do not believe that there are no mutual funds that outperform, just that it is extremely difficult to pick them, and that over time, passive low cost investing is more likely to let us reach our goals. Eventually mutual funds that outperform will rever, as per the 10 year returns in the chart.
Thanks Mhalley!

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Re: American Funds Propaganda. Help me understand.

Post by Jack FFR1846 » Wed May 15, 2019 11:25 am

Pick 10 American Funds today. Wait 10 years. Take the 5 worst performing of these and dissolve them, moving the equity into some of the other funds. Now you have 5. Wait 10 years. Take the 3 worst performing and dissolve them and put the equity into the 2 remaining. Now your AF rep says "Look at the stellar performance of these 2 funds". If you can identify dissolved funds, ask about them.

If you want "MY" response to the AF rep.....it would be: "Who cares?".
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Re: American Funds Propaganda. Help me understand.

Post by fabdog » Wed May 15, 2019 11:30 am

your comparison charts are looking at two different timelines. If you'd had money in the American funds since 1976 you'd be doing well against the S&P. But that's not the issue facing you on where to invest today :happy

Several of their funds did well coming out of the tech wreck as they hadn't gotten caught up in that mess.

American funds are certainly not horrible, especially if you can get a relatively lower fee version and there are no low fee index funds in your plan. I have used their funds in those circumstances (They long had the best International offering in my 401k)

But as MHalley noted, the landscape in investing has changed a lot especially with all of the info available to everyone

But if you have low cost index funds they are your best bets. There will be American funds (and others) that may outperform in any given year, but you can't know that in advance, and over longer periods it's tough to overcome the expense drag

In general, anything a salesman is pushing has an extra drag... as somewhere there's a fee structure to compensate them

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Re: American Funds Propaganda. Help me understand.

Post by deltaneutral83 » Wed May 15, 2019 1:23 pm

Make sure whichever active funds the "guy" is peddling don't have reinvested div's if the S&P doesn't. That's usually rule # 1 for me.

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Re: American Funds Propaganda. Help me understand.

Post by onourway » Wed May 15, 2019 1:25 pm

Great. Ask him if he can invest your money today in the funds that will have that level of out-performance for the next 30 years. :D

If you plot the performance of those funds over the past 10-20 years, you'll find that they are generally pretty similar to their index. Most of the out-performance in that chart comes from a few good years early on.

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Re: American Funds Propaganda. Help me understand.

Post by Nate79 » Wed May 15, 2019 2:17 pm

Jack FFR1846 wrote:
Wed May 15, 2019 11:25 am
Pick 10 American Funds today. Wait 10 years. Take the 5 worst performing of these and dissolve them, moving the equity into some of the other funds. Now you have 5. Wait 10 years. Take the 3 worst performing and dissolve them and put the equity into the 2 remaining. Now your AF rep says "Look at the stellar performance of these 2 funds". If you can identify dissolved funds, ask about them.

If you want "MY" response to the AF rep.....it would be: "Who cares?".
Which American Funds have been dissolved? What percentage of their funds are they closing? Please post your research because based on your post I assume you have done some research to back it up.

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Re: American Funds Propaganda. Help me understand.

Post by Raybo » Wed May 15, 2019 2:56 pm

The text you posted says nothing about dividends. Do the numbers include dividends? If not, what happened to them?

It says the investments were rebalanced monthly. Who would do that with loaded funds?

The S&P 500 is a large cap fund. Comparing 5 US funds against the S&P 500 is misleading. The entire purpose of this exercise is to make these funds, in aggregate, look better than the they really are. Are all 5 still open? Have they changed how they invest as they grew?

Why believe such a salesperson?
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Re: American Funds Propaganda. Help me understand.

Post by pdavi21 » Wed May 15, 2019 3:07 pm

They won. There's nothing to understand.

If you put BRK/B or VPMAX or FCNTX on those charts, you'd probably get similar results.
Stellar performance from 1976-2019 and mediocre performance in the last 10 years.

EDIT: 10 year performance ending May 14th 2019:
VTI: 292%
BRK/B: 249%
VPMAX: 319%
FCNTX: 317%

EDIT: Performance since May 1985:
VFINX: 3,320%
BRK/A: 17,500%
FCNTX: 7,722%
VPMCX: 5,745% (Jan 1986)
Last edited by pdavi21 on Wed May 15, 2019 3:17 pm, edited 1 time in total.
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Re: American Funds Propaganda. Help me understand.

Post by fortfun » Wed May 15, 2019 3:14 pm

Raybo wrote:
Wed May 15, 2019 2:56 pm
The text you posted says nothing about dividends. Do the numbers include dividends? If not, what happened to them?

It says the investments were rebalanced monthly. Who would do that with loaded funds?

The S&P 500 is a large cap fund. Comparing 5 US funds against the S&P 500 is misleading. The entire purpose of this exercise is to make these funds, in aggregate, look better than the they really are. Are all 5 still open? Have they changed how they invest as they grew?

Why believe such a salesperson?
I believe the PDF indicates that they were re-invested. I don't believe him but wanted to counter his claim. It is a mute point, as his 403b plans have a 1.15% annuity wrapper free anyway.

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Re: American Funds Propaganda. Help me understand.

Post by fortfun » Wed May 15, 2019 3:15 pm

pdavi21 wrote:
Wed May 15, 2019 3:07 pm
They won. There's nothing to understand.

If you put BRK/B or VPMAX or FCNTX on those charts, you'd probably get similar results.
Stellar performance from 1976-2019 and mediocre performance in the last 10 years.

EDIT: 10 year performance ending May 14th 2019:
VTI: 292%
BRK/B: 249%
VPMAX: 319%
FCNTX: 317%
The mediocre performance is due to?

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Re: American Funds Propaganda. Help me understand.

Post by pdavi21 » Wed May 15, 2019 3:19 pm

fortfun wrote:
Wed May 15, 2019 3:15 pm
pdavi21 wrote:
Wed May 15, 2019 3:07 pm
They won. There's nothing to understand.

If you put BRK/B or VPMAX or FCNTX on those charts, you'd probably get similar results.
Stellar performance from 1976-2019 and mediocre performance in the last 10 years.

EDIT: 10 year performance ending May 14th 2019:
VTI: 292%
BRK/B: 249%
VPMAX: 319%
FCNTX: 317%
The mediocre performance is due to?
If there was a logical reason behind the mediocre performance, the funds would've never performed well in the first place (EDIT: or would have performed less well). There is no reason.

EDIT: There are some half reasons. One is survivorship bias. It's when good funds get more popular and bad ones get closed. The three examples I used were funds I believe are popular today. Perhaps they were not as popular in 1985-6. Another reason I believe is a fake reason, but might be true, is that larger funds have less options, liquidity. I think it's a fake reason because how many managers have beat a 25% x 4 FANG portfolio (which large funds could do)? Probably zero.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: American Funds Propaganda. Help me understand.

Post by 02nz » Wed May 15, 2019 3:30 pm

Over the past 10 years the Growth Fund of America has returned less than 15% CAGR. Not bad, but you would've done better with Vanguard U.S. Growth Index or PRIMECAP (both about 16% CAGR over the same period, which comes out to about 12% higher balance). The chart looks great, as you suspect, because of out-performance 30-40 years ago. Let this salesman know you'll be happy to invest as long as he can bring back the team that managed Growth Fund of America in 1979, and also reduce the fund's AUM to the same level as back then, so the team can work its magic. :twisted:

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Re: American Funds Propaganda. Help me understand.

Post by Dialectical Investor » Wed May 15, 2019 3:33 pm

fortfun wrote:
Wed May 15, 2019 10:41 am

Notice that in his PDF, the AF performance, over the past 10 years looks amazing.
I don't see any reason to argue with salespeople, but the PDF chart being a linear scale exacerbates the appearance of outperformance compared to the M* chart that seems to use a logarithmic scale.

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Re: American Funds Propaganda. Help me understand.

Post by vineviz » Wed May 15, 2019 3:56 pm

fortfun wrote:
Wed May 15, 2019 10:41 am
The 403b salesman followed up my, "No thank you" email with another PDF. He was certain this was proof that American Funds beat the index. Notice that in his PDF, the AF performance, over the past 10 years looks amazing. However, if you look at my Morningstar chart, the performance of the AF funds have been dismal, over the past 10 years. So, I'm assuming the AF funds had some exceptional years back in their early days and due to this, along with compounding interest, AF is able to create these amazing looking results. Is this correct? If so, was it easier to beat the index in the early days of the S&P? Also, the Morningstar chart makes AF look like a down right awful choice, yes? Evidently, their stock picking has been poor the last 10 years, yes? If a person had DCAed during this entire period, VTSAX would have beat out their managed funds, yes?
You can always assume the a marketing sheet is going to put the proposed fund in the best light. Working out how to understand what is really true performance and what isn't is a useful skill, and I'll walk through the way I'd think about a question like this.

I'll start by comparing results of American Funds Growth Fund of America (AGTHX) with Vanguard 500 Index Fund (VFINX) from 8/31/1976 to now.

Image

At first blush, $10,000 in AGTHX would have grown to $2,777,676 versus $880,597.

The first thing to remember is American Funds Growth Fund of America has always had a sales load, so 5.75% of your initial $10,000 went directly to your broker in 1976. So your starting investment in AGTHX was only $9,425 versus the full $10,000 with VFINX. That lowers your final result by $159,716 to $2,617,959.

Also notice that the two funds weren't equally risky (AGTHX has a stdev of 16.71% versus 14.69% for VFINX). The first tenet of investing is that return and risk are joined at the hip. For an apples-to-apples comparison you need to reduce the volatility of AGTHX to match VFINX, which I did by mixing about 12% cash with 88% AGTHX. This brings the return of AGTHX to $1,782,263, which is still considerably more than VFINX but is already a million dollars less than the initial naive comparison.

So let's look at the historical performance of the funds.

Image

You can see that AGTHX has not gained its outperformance steadily, but rather the vast bulk of the outperformance came in two bursts (1976-1983 and 1998-2000). Knowing what I do about stock market history, I have a theory. Let's look at an analysis of the factor exposure of the two funds to see if I'm right.

Image

The blue line is the exposure to the market factor (i.e. market beta), the red line is exposure to the size factor (i.e. small stocks), and the orange line is alpha (i.e. the residual performance, including stock picking expertise and fund costs).

For the first 20 years you can see that AGTHX had a market beta of about 1.20 (VFINX by definition is always 1.0), which partly explains the higher volatility (or risk) of that funds.

Just as impactful is the high exposure to size (the red line) up until about 2005 or so. AGTHX was essentially a small/mid cap fund for most of its history, and in the periods where it outperformed (1976-1983 and 1998-2000) this was a huge help. AGTHX has grown too much to ever own that many small/mid cap stocks again, even if the managers wanted to.

These two factors illustrate the bulk of the relative outperformance of American Funds Growth Fund of America (AGTHX): taking on more market risk and a tilt to small cap stocks when the fund was young.

Finally, the alpha line illustrates that up until about 2001 or so the fund managers were able to generate some additional outperformance (and occasionally underperformance) through stock-picking. Since then, though, the fund basically amounts to a closet index fund.
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Re: American Funds Propaganda. Help me understand.

Post by pretzelfisch » Wed May 15, 2019 4:44 pm

fortfun wrote:
Wed May 15, 2019 10:41 am
The 403b salesman followed up my, "No thank you" email with another PDF. He was certain this was proof that American Funds beat the index. Notice that in his PDF, the AF performance, over the past 10 years looks amazing. However, if you look at my Morningstar chart, the performance of the AF funds have been dismal, over the past 10 years. So, I'm assuming the AF funds had some exceptional years back in their early days and due to this, along with compounding interest, AF is able to create these amazing looking results. Is this correct? If so, was it easier to beat the index in the early days of the S&P? Also, the Morningstar chart makes AF look like a down right awful choice, yes? Evidently, their stock picking has been poor the last 10 years, yes? If a person had DCAed during this entire period, VTSAX would have beat out their managed funds, yes?

Image

Image
Image

Image
Several of America Funds like the Growth Fund of America have bonds.

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Re: American Funds Propaganda. Help me understand.

Post by Reb Tevye » Wed May 15, 2019 6:19 pm

It is important that you know about the SPIVA report on active vs passive management. A careful read is valuable now and again.
https://www.spglobal.com/_assets/docume ... h-2019.pdf

Here is my understanding...
In any given timeframe, half of all active dollars, before fees, will outperform their index if they are true to their index. And half of active dollars will underperform. AFAIK, that’s a provable math exercise.
Some will be by luck, some will be skill. It will be impossible to know which.

With each increment of time passing, an increasing % of active dollars will underperform their index. That occurs due to their fees. Again, that is math of the fees and other fund choices. You can see that trend clearly in Report 1 on page 9.

So, some active funds WILL outperform their index. It’s right there in this authoritative report.

But it will be cumulatively fewer and fewer each year.

And for the ones that do, it’s impossible to know how much of the outperformance is skill, or just a streak of luck. My understanding is that the number of outperformers is largely explained by chance. But never entirely.

I have no idea about survivorship bias in AF marketing. But you can see how generally prevalent it is in the report.

So, you need to ask yourself if achieving the “market return” is good enough for you over the very long term. If it is, you are all but assured of coming close, after fees, if you choose a 0.03% ER Total Market fund. As you stray away from that, the cone of possible future returns become increasingly wider. With fewer and fewer outcomes on the higher side of the “index return” line.

Now, queue the Dirty Harry quote.
Last edited by Reb Tevye on Wed May 15, 2019 6:26 pm, edited 2 times in total.
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Re: American Funds Propaganda. Help me understand.

Post by Toons » Wed May 15, 2019 6:23 pm

Do you need to "Beat The Index"
to achieve your financial goals?



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Re: American Funds Propaganda. Help me understand.

Post by AerialWombat » Wed May 15, 2019 6:32 pm

I was reading this puff piece yesterday and found it interesting:

https://www.bloomberg.com/news/features ... -investing

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Re: American Funds Propaganda. Help me understand.

Post by fortfun » Wed May 15, 2019 9:16 pm

AerialWombat wrote:
Wed May 15, 2019 6:32 pm
I was reading this puff piece yesterday and found it interesting:

https://www.bloomberg.com/news/features ... -investing
Interesting. I wonder if there 2020 fund had a higher proportion of bonds???

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Re: American Funds Propaganda. Help me understand.

Post by fortfun » Wed May 15, 2019 9:18 pm

vineviz wrote:
Wed May 15, 2019 3:56 pm
fortfun wrote:
Wed May 15, 2019 10:41 am
The 403b salesman followed up my, "No thank you" email with another PDF. He was certain this was proof that American Funds beat the index. Notice that in his PDF, the AF performance, over the past 10 years looks amazing. However, if you look at my Morningstar chart, the performance of the AF funds have been dismal, over the past 10 years. So, I'm assuming the AF funds had some exceptional years back in their early days and due to this, along with compounding interest, AF is able to create these amazing looking results. Is this correct? If so, was it easier to beat the index in the early days of the S&P? Also, the Morningstar chart makes AF look like a down right awful choice, yes? Evidently, their stock picking has been poor the last 10 years, yes? If a person had DCAed during this entire period, VTSAX would have beat out their managed funds, yes?
You can always assume the a marketing sheet is going to put the proposed fund in the best light. Working out how to understand what is really true performance and what isn't is a useful skill, and I'll walk through the way I'd think about a question like this.

I'll start by comparing results of American Funds Growth Fund of America (AGTHX) with Vanguard 500 Index Fund (VFINX) from 8/31/1976 to now.

Image

At first blush, $10,000 in AGTHX would have grown to $2,777,676 versus $880,597.

The first thing to remember is American Funds Growth Fund of America has always had a sales load, so 5.75% of your initial $10,000 went directly to your broker in 1976. So your starting investment in AGTHX was only $9,425 versus the full $10,000 with VFINX. That lowers your final result by $159,716 to $2,617,959.

Also notice that the two funds weren't equally risky (AGTHX has a stdev of 16.71% versus 14.69% for VFINX). The first tenet of investing is that return and risk are joined at the hip. For an apples-to-apples comparison you need to reduce the volatility of AGTHX to match VFINX, which I did by mixing about 12% cash with 88% AGTHX. This brings the return of AGTHX to $1,782,263, which is still considerably more than VFINX but is already a million dollars less than the initial naive comparison.

So let's look at the historical performance of the funds.

Image

You can see that AGTHX has not gained its outperformance steadily, but rather the vast bulk of the outperformance came in two bursts (1976-1983 and 1998-2000). Knowing what I do about stock market history, I have a theory. Let's look at an analysis of the factor exposure of the two funds to see if I'm right.

Image

The blue line is the exposure to the market factor (i.e. market beta), the red line is exposure to the size factor (i.e. small stocks), and the orange line is alpha (i.e. the residual performance, including stock picking expertise and fund costs).

For the first 20 years you can see that AGTHX had a market beta of about 1.20 (VFINX by definition is always 1.0), which partly explains the higher volatility (or risk) of that funds.

Just as impactful is the high exposure to size (the red line) up until about 2005 or so. AGTHX was essentially a small/mid cap fund for most of its history, and in the periods where it outperformed (1976-1983 and 1998-2000) this was a huge help. AGTHX has grown too much to ever own that many small/mid cap stocks again, even if the managers wanted to.

These two factors illustrate the bulk of the relative outperformance of American Funds Growth Fund of America (AGTHX): taking on more market risk and a tilt to small cap stocks when the fund was young.

Finally, the alpha line illustrates that up until about 2001 or so the fund managers were able to generate some additional outperformance (and occasionally underperformance) through stock-picking. Since then, though, the fund basically amounts to a closet index fund.
Nice analysis.

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Re: American Funds Propaganda. Help me understand.

Post by Aa555555 » Thu May 16, 2019 5:25 am

How do you plan to be invested in the market? 10 years or 40 years?

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Re: American Funds Propaganda. Help me understand.

Post by Aa555555 » Thu May 16, 2019 5:29 am

Jack FFR1846 wrote:
Wed May 15, 2019 11:25 am
Pick 10 American Funds today. Wait 10 years. Take the 5 worst performing of these and dissolve them, moving the equity into some of the other funds. Now you have 5. Wait 10 years. Take the 3 worst performing and dissolve them and put the equity into the 2 remaining. Now your AF rep says "Look at the stellar performance of these 2 funds". If you can identify dissolved funds, ask about them.

If you want "MY" response to the AF rep.....it would be: "Who cares?".
If you go to their website that seems like 1 consistent thing they don't do. All of the funds have been around for decades. They've launched one new fund since 2005

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Re: American Funds Propaganda. Help me understand.

Post by Aa555555 » Thu May 16, 2019 5:42 am

vineviz wrote:
Wed May 15, 2019 3:56 pm
fortfun wrote:
Wed May 15, 2019 10:41 am
The 403b salesman followed up my, "No thank you" email with another PDF. He was certain this was proof that American Funds beat the index. Notice that in his PDF, the AF performance, over the past 10 years looks amazing. However, if you look at my Morningstar chart, the performance of the AF funds have been dismal, over the past 10 years. So, I'm assuming the AF funds had some exceptional years back in their early days and due to this, along with compounding interest, AF is able to create these amazing looking results. Is this correct? If so, was it easier to beat the index in the early days of the S&P? Also, the Morningstar chart makes AF look like a down right awful choice, yes? Evidently, their stock picking has been poor the last 10 years, yes? If a person had DCAed during this entire period, VTSAX would have beat out their managed funds, yes?
You can always assume the a marketing sheet is going to put the proposed fund in the best light. Working out how to understand what is really true performance and what isn't is a useful skill, and I'll walk through the way I'd think about a question like this.

I'll start by comparing results of American Funds Growth Fund of America (AGTHX) with Vanguard 500 Index Fund (VFINX) from 8/31/1976 to now.

Image

At first blush, $10,000 in AGTHX would have grown to $2,777,676 versus $880,597.

The first thing to remember is American Funds Growth Fund of America has always had a sales load, so 5.75% of your initial $10,000 went directly to your broker in 1976. So your starting investment in AGTHX was only $9,425 versus the full $10,000 with VFINX. That lowers your final result by $159,716 to $2,617,959.

Also notice that the two funds weren't equally risky (AGTHX has a stdev of 16.71% versus 14.69% for VFINX). The first tenet of investing is that return and risk are joined at the hip. For an apples-to-apples comparison you need to reduce the volatility of AGTHX to match VFINX, which I did by mixing about 12% cash with 88% AGTHX. This brings the return of AGTHX to $1,782,263, which is still considerably more than VFINX but is already a million dollars less than the initial naive comparison.

So let's look at the historical performance of the funds.

Image

You can see that AGTHX has not gained its outperformance steadily, but rather the vast bulk of the outperformance came in two bursts (1976-1983 and 1998-2000). Knowing what I do about stock market history, I have a theory. Let's look at an analysis of the factor exposure of the two funds to see if I'm right.

Image

The blue line is the exposure to the market factor (i.e. market beta), the red line is exposure to the size factor (i.e. small stocks), and the orange line is alpha (i.e. the residual performance, including stock picking expertise and fund costs).

For the first 20 years you can see that AGTHX had a market beta of about 1.20 (VFINX by definition is always 1.0), which partly explains the higher volatility (or risk) of that funds.

Just as impactful is the high exposure to size (the red line) up until about 2005 or so. AGTHX was essentially a small/mid cap fund for most of its history, and in the periods where it outperformed (1976-1983 and 1998-2000) this was a huge help. AGTHX has grown too much to ever own that many small/mid cap stocks again, even if the managers wanted to.

These two factors illustrate the bulk of the relative outperformance of American Funds Growth Fund of America (AGTHX): taking on more market risk and a tilt to small cap stocks when the fund was young.

Finally, the alpha line illustrates that up until about 2001 or so the fund managers were able to generate some additional outperformance (and occasionally underperformance) through stock-picking. Since then, though, the fund basically amounts to a closet index fund.
I'm a bit perplexed here. I believe the purpose of having a money manager is to know where to invest in opportune times. I.e. your statement on investing in small cap. I believe as well knowing how to invest and reducing standard deviation while achieving same results or better is also the purpose of having a fund manager. I also believe that the purpose of a fund manager is to invest over long periods of time i.e. retirement like 403B? If your 30 years old you'll be in the market for 60 years. If your 60 years old you'll be in the 30 years. Your statement of the last 10 years seems to fit advice for someone who is 80 years of age.

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Re: American Funds Propaganda. Help me understand.

Post by vineviz » Thu May 16, 2019 7:17 am

Aa555555 wrote:
Thu May 16, 2019 5:42 am
I'm a bit perplexed here. I believe the purpose of having a money manager is to know where to invest in opportune times.
I suspect you aren't the only person with this belief, but we've got decades of research that demonstrate that such a belief is unsupported by evidence. That is, money managers generally are not very good at doing this well enough to earn their keep.

The much more mainstream, and well-supported, approach is to separate the asset allocation decisions from the stock-selection decisions and setting the asset allocation decisions based on both risk appetite and expected relative asset class performance.
Aa555555 wrote:
Thu May 16, 2019 5:42 am
I also believe that the purpose of a fund manager is to invest over long periods of time i.e. retirement like 403B? If your 30 years old you'll be in the market for 60 years. If your 60 years old you'll be in the 30 years. Your statement of the last 10 years seems to fit advice for someone who is 80 years of age.
Many investors are, indeed, investing over long periods of time and I totally endorse taking a long-term approach when appropriate.

When evaluating an actively managed fund based on past performance, the relevant question is this how likely past (good) performance is likely to recur in the future? In order to answer this question you must first understand the drivers of the past performance, and in this case the evidence suggests that the reasons the fund performed well in the 1970s and 1980s are unlikely to be replicable going forward.

I'm not saying the past (or even future) managers of American Funds Growth Fund of America had no skill: clearly they did. They also had more than a little bit of luck (e.g. launching a small cap fund near the beginning of a phenomenal small cap rally), and there is not sense paying someone just because they were lucky in the past.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

EarningBack
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Re: American Funds Propaganda. Help me understand.

Post by EarningBack » Sat Sep 21, 2019 11:16 pm

Great topic and analysis(s)! I recall on one of the bogleheads podcasts, there was a guest who used a combination of actively managed and index funds, but she didn't say which actively managed funds she liked (not that she was asked).

I'm curious what percentage of investors in this community voluntarily use actively managed funds, and do they share what actively managed funds they like or do they keep it a "secret" (if that's even still possible in this day and age) out of fear that the funds would grow too large?

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Re: American Funds Propaganda. Help me understand.

Post by dbr » Sun Sep 22, 2019 12:47 pm

EarningBack wrote:
Sat Sep 21, 2019 11:16 pm
Great topic and analysis(s)! I recall on one of the bogleheads podcasts, there was a guest who used a combination of actively managed and index funds, but she didn't say which actively managed funds she liked (not that she was asked).

I'm curious what percentage of investors in this community voluntarily use actively managed funds, and do they share what actively managed funds they like or do they keep it a "secret" (if that's even still possible in this day and age) out of fear that the funds would grow too large?
There is a huge BH cabal of Wellington/Wellesley investors. I haven't owned these funds and don't know the secret handshake myself.

Also, a technicality, most Vanguard Treasury bond funds are not index funds. To say they are actively managed in the usual sense of the word might be going too far.

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Re: American Funds Propaganda. Help me understand.

Post by Dottie57 » Sun Sep 22, 2019 3:35 pm

OP,

All you need to say to the salesman is that you want to invest in Vanguard funds. Unless he is willing to PERSONALLY GUARANTEE in writing America Funds will outperform Vanguard funds and he or she will pay you the difference, your mind is made up.

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Re: American Funds Propaganda. Help me understand.

Post by prd1982 » Sun Sep 22, 2019 4:18 pm

Dottie57 wrote:
Sun Sep 22, 2019 3:35 pm
. Unless he is willing to PERSONALLY GUARANTEE in writing America Funds will outperform Vanguard funds and he or she will pay you the difference, your mind is made up.
So, if I go to Vanguard and say I will move my investments from AF to V only if he or she ....

I would agree that it makes sense to invest in index vs. active funds. But if your 401K only has active funds, AF is a reasonable choice, esp if there isn't a load. From reading this forum, there are so many worse choices.

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Re: American Funds Propaganda. Help me understand.

Post by Shamb3 » Sun Sep 22, 2019 7:20 pm

Start date is super important.

Put S&P 500 and Russel 2000 and a international index on the same graph. Move the start date around.

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Re: American Funds Propaganda. Help me understand.

Post by Target2019 » Sun Sep 22, 2019 7:58 pm

Compare the fund performance to its Russell 1000 benchmark, or a similar fund with same benchmark.

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Re: American Funds Propaganda. Help me understand.

Post by rascott » Sun Sep 22, 2019 8:49 pm

American Funds aren't bad at all, one could do a lot worse. The killer is the idea of paying someone nearly 6% load on every buy. That's revolting.

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Re: American Funds Propaganda. Help me understand.

Post by mongstradamus » Sun Sep 22, 2019 9:25 pm

rascott wrote:
Sun Sep 22, 2019 8:49 pm
American Funds aren't bad at all, one could do a lot worse. The killer is the idea of paying someone nearly 6% load on every buy. That's revolting.
I agree that some of their funds aren't the worst thing in the world if their expense ratios are in check. For example my mom has their balanced fund in her 401k, i wanted to make it easy for her so i set her up with that fund. It has a .28 expense ratio not too bad for active fund. I think it would have been much more difficult to set up a 3 fund portfolio for her and have her understand how to rebalance.

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Re: American Funds Propaganda. Help me understand.

Post by rascott » Sun Sep 22, 2019 11:25 pm

mongstradamus wrote:
Sun Sep 22, 2019 9:25 pm
rascott wrote:
Sun Sep 22, 2019 8:49 pm
American Funds aren't bad at all, one could do a lot worse. The killer is the idea of paying someone nearly 6% load on every buy. That's revolting.
I agree that some of their funds aren't the worst thing in the world if their expense ratios are in check. For example my mom has their balanced fund in her 401k, i wanted to make it easy for her so i set her up with that fund. It has a .28 expense ratio not too bad for active fund. I think it would have been much more difficult to set up a 3 fund portfolio for her and have her understand how to rebalance.

Plenty of folks here use actively managed Wellington/ Wellesley, e.t.c... which are no different than what you've described, and basically the same cost.

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Re: American Funds Propaganda. Help me understand.

Post by vineviz » Mon Sep 23, 2019 6:33 am

rascott wrote:
Sun Sep 22, 2019 8:49 pm
American Funds aren't bad at all, one could do a lot worse. The killer is the idea of paying someone nearly 6% load on every buy. That's revolting.
+1

I have very few firm rules about investing, but "never pay a sales load" is one of them.

That said, there are a handful of actively managed fund families I would consider in the absence of decent index fund offerings (e.g. in a 401(k) or 403(b) plan): American Funds, Dodge & Cox, Fidelity, T. Rowe Price, and Vanguard would be on the list I think.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: American Funds Propaganda. Help me understand.

Post by neurosphere » Mon Sep 23, 2019 7:25 am

vineviz wrote:
Mon Sep 23, 2019 6:33 am
That said, there are a handful of actively managed fund families I would consider in the absence of decent index fund offerings (e.g. in a 401(k) or 403(b) plan): American Funds, Dodge & Cox, Fidelity, T. Rowe Price, and Vanguard would be on the list I think.
Pay attention to whether active funds are in taxable accounts vs tax-advantaged accounts, as capital gains can certainly decrease returns (after-tax). The Dodge and Cox stock fund posted a 2018 4th quarter capital gain of $14 per share on a share price of $175. I know an investor who had large holdings in this fund, and the unexpected capital gains messed up his tax planning (he got penalties for insufficient withholding and estimated taxes). Although to be honest, I'm not sure how "outsized" this kind of distribution really was for an active fund, i.e. compared to American Funds or other families. I don't pay much attention to active funds, particularly in taxable accounts. :)

https://dodgeandcox.com/performance_HD.asp
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Re: American Funds Propaganda. Help me understand.

Post by vineviz » Mon Sep 23, 2019 7:42 am

neurosphere wrote:
Mon Sep 23, 2019 7:25 am
vineviz wrote:
Mon Sep 23, 2019 6:33 am
That said, there are a handful of actively managed fund families I would consider in the absence of decent index fund offerings (e.g. in a 401(k) or 403(b) plan): American Funds, Dodge & Cox, Fidelity, T. Rowe Price, and Vanguard would be on the list I think.
Pay attention to whether active funds are in taxable accounts vs tax-advantaged accounts, as capital gains can certainly decrease returns (after-tax). The Dodge and Cox stock fund posted a 2018 4th quarter capital gain of $14 per share on a share price of $175. I know an investor who had large holdings in this fund, and the unexpected capital gains messed up his tax planning (he got penalties for insufficient withholding and estimated taxes). Although to be honest, I'm not sure how "outsized" this kind of distribution really was for an active fund, i.e. compared to American Funds or other families. I don't pay much attention to active funds, particularly in taxable accounts. :)

https://dodgeandcox.com/performance_HD.asp
That's a fair point. Penalties on unexpected 4th quarter income are entirely avoidable, but I suspect that not a lot of investors are paying close enough attention to react quickly enough.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: American Funds Propaganda. Help me understand.

Post by Dottie57 » Mon Sep 23, 2019 8:46 am

prd1982 wrote:
Sun Sep 22, 2019 4:18 pm
Dottie57 wrote:
Sun Sep 22, 2019 3:35 pm
. Unless he is willing to PERSONALLY GUARANTEE in writing America Funds will outperform Vanguard funds and he or she will pay you the difference, your mind is made up.
So, if I go to Vanguard and say I will move my investments from AF to V only if he or she ....

I would agree that it makes sense to invest in index vs. active funds. But if your 401K only has active funds, AF is a reasonable choice, esp if there isn't a load. From reading this forum, there are so many worse choices.
If you don’t Have lower cost index options the AF IS ok. I had them during Great Recession and they recovered quite well.

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Re: American Funds Propaganda. Help me understand.

Post by wolf359 » Mon Sep 23, 2019 9:10 am

Mr. AF Salesman, these are absolutely fantastic results! Can I invest on August 31, 1976, like in the charts? Wait, I can't?

Well, how do I know if American Funds is going to repeat its performance over the next 30 years? There's this little statement in your prospectus that says, "Past performance is not indicative of future results." If I disregard past performance, and I can't go back in time and capture those great results, then...

Remind me why am I talking to you again?

Edit: Just jesting. I do not trade in active funds. If I had to, American Funds is one of the few companies that do it well. I have owned a fund or two of theirs in a 401-k in the past. If your 401-k has high-cost index funds instead of low-cost index funds, then I'd evaluate the active funds as an alternative.

If you do buy active funds, those with low turnover and minimal expenses are the ones that are more likely to perform better. Also, active funds MUST be held in a tax advantaged account like an IRA or 401-k.

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Re: American Funds Propaganda. Help me understand.

Post by Kenkat » Mon Sep 23, 2019 11:01 am

American Funds are relatively low cost and low turnover, so they can be competitive with index funds in much the same way that Vanguard active funds such as Wellington or Primecap can be. And you are far better off paying a front end load of 5.5% and holding the funds for 20 years than paying someone 1%+ per year, every year for financial advice. That said, if you don’t need financial advice and can choose any fund you want, there’s no real reason to expect American Funds to outperform their index in the future. So, given the choice, I’d stick with Vanguard if you have that option.

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Re: American Funds Propaganda. Help me understand.

Post by deltaneutral83 » Mon Sep 23, 2019 11:06 am

rascott wrote:
Sun Sep 22, 2019 8:49 pm
American Funds aren't bad at all, one could do a lot worse. The killer is the idea of paying someone nearly 6% load on every buy. That's revolting.
Over a 35 year investing career, 1% AUM a year would be substantially worse than 5.75% (on the first $100k of American Funds, then the load decreases) up front. AF take a bigger chunk than most BH's would ever dream of paying but they don't take nearly what the others do.

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Re: American Funds Propaganda. Help me understand.

Post by sschullo » Mon Sep 23, 2019 11:32 am

If this salesman and his boss sign the fiduciary oath to look out for your best interests over theirs, and both can have a written guarantee with the same outperformance over the averages with the same team who picked the same stocks, same quantities, with the same PE ratios, same standard deviations, same psychological momentum, and those corporations delivered the same profits with the same executive team, same CEO, same research and development results IN THE FUTURE, I'm all in and will bet the house and the farm to boot.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: American Funds Propaganda. Help me understand.

Post by neurosphere » Mon Sep 23, 2019 12:23 pm

fortfun wrote:
Wed May 15, 2019 3:14 pm
It is a mute point, as his 403b plans have a 1.15% annuity wrapper free anyway.
Do ALL funds in the 403b come with this 1.15% fee, in addition to the expense ratio? That is, will you pay this 1.15% regardless of your investment choices?

Do the American Funds also have a load, in addition to this wrap fee?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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Re: American Funds Propaganda. Help me understand.

Post by fortfun » Mon Sep 23, 2019 8:02 pm

neurosphere wrote:
Mon Sep 23, 2019 12:23 pm
fortfun wrote:
Wed May 15, 2019 3:14 pm
It is a mute point, as his 403b plans have a 1.15% annuity wrapper free anyway.
Do ALL funds in the 403b come with this 1.15% fee, in addition to the expense ratio? That is, will you pay this 1.15% regardless of your investment choices?

Do the American Funds also have a load, in addition to this wrap fee?
neurosphere, I need to look at my notes. I actually think he was trying to sell me the American Funds for my Roth (which I already do with Vanguard Tot US and Tot Int admiral funds). I don't believe they were even available in the 403b plan. He just pulled out the glossy American Fund brochures when I told him it was difficult to beat the S&P500 over the long run. I will check to see which funds are actually available in the 403b plan. But yes, they come with a whole host of fees. I'll post them tomorrow. The American Fund just came with the high ER and sales loads.

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