Investing with American Funds like betting on Tiger Woods

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dwickenh
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Investing with American Funds like betting on Tiger Woods

Post by dwickenh » Sun Apr 23, 2017 10:13 pm

An interesting article about American Funds recent claims of beating the index funds. I have seen several posts here about the same story.




https://assetbuilder.com/knowledge-cent ... iger-woods

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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FiveK
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Re: Investing with American Funds like betting on Tiger Woods

Post by FiveK » Mon Apr 24, 2017 12:54 am

Nice analogy.

Whether one thinks of the time axis as going forward or backward does make a difference, e.g.,
It appears that their funds are pulling further and further ahead of the stock market index. But let’s draw back the curtain. Recent scores aren’t as strong as that colorful graphic claim.

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Re: Investing with American Funds like betting on Tiger Woods

Post by bjr89 » Mon Apr 24, 2017 3:18 am

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Last edited by bjr89 on Fri Nov 16, 2018 7:54 pm, edited 1 time in total.

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JoMoney
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Re: Investing with American Funds like betting on Tiger Woods

Post by JoMoney » Mon Apr 24, 2017 4:20 am

If you compare their "Growth Fund of America" to a mixture of S&P500 + enough of the Mid-Cap index to have the same standard deviation as the active fund, it also doesn't hold up, even when ignoring the American Funds sales load.
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Earl Lemongrab
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Re: Investing with American Funds like betting on Tiger Woods

Post by Earl Lemongrab » Mon Apr 24, 2017 12:48 pm

I think it's a poor analogy. Tiger is tailing off because he's in athletics, where age and body condition matter a lot. Not in investing. If you want a sports analogy, pick betting on the UConn women's basketball team. The win year after year, but the team changes.

Note that I don't believe any managed fund is likely to outperform, even the "W darlings" from Vanguard.

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Re: Investing with American Funds like betting on Tiger Woods

Post by nedsaid » Mon Apr 24, 2017 1:38 pm

The American Funds are a good fund group. As with all good managers, at some point they have to face the problem of asset bloat. Even Warren Buffett has admitted to this problem. I think they will give good performance going forward but it will get harder for them to beat the indexes. The markets keep getting more and more efficient.
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Re: Investing with American Funds like betting on Tiger Woods

Post by Wakefield1 » Mon Apr 24, 2017 5:20 pm

If American Funds are like betting on Tiger Woods I wonder who T. Rowe Price is like betting on? Or Dodge and Cox? 8-)

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Re: Investing with American Funds like betting on Tiger Woods

Post by oldcomputerguy » Mon Apr 24, 2017 5:49 pm

What I find interesting is that the American Funds graphic shown in the article tries to benchmark everything against the S&P 500. But that's not appropriate in at least some of the funds cited. For example, the top-performing fund in the graphic (Growth Fund of America, ticker AGTHX) is a large-cap growth mutual fund. As such, it should be benchmarked against an index of growth stocks. As a proxy, I did a comparison between AGTHX and Vanguard's Large-Cap Growth Index Fund VIGAX. The numbers are quite a bit different from what the graphic would lead one to believe:

Code: Select all

 	Vanguard Growth
         Index Fund Adm	Growth Fund of America	 	 	 
YTD		9.59%	                   8.11%
1-year	15.91%	                   13.39%
3-year	10.65%	                   8.04%
5-year	12.91%	                   12.37%
10-year	9.00%	                   6.99%
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dwickenh
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Re: Investing with American Funds like betting on Tiger Woods

Post by dwickenh » Mon Apr 24, 2017 8:17 pm

oldcomputerguy wrote:What I find interesting is that the American Funds graphic shown in the article tries to benchmark everything against the S&P 500. But that's not appropriate in at least some of the funds cited. For example, the top-performing fund in the graphic (Growth Fund of America, ticker AGTHX) is a large-cap growth mutual fund. As such, it should be benchmarked against an index of growth stocks. As a proxy, I did a comparison between AGTHX and Vanguard's Large-Cap Growth Index Fund VIGAX. The numbers are quite a bit different from what the graphic would lead one to believe:

Code: Select all

 	Vanguard Growth
         Index Fund Adm	Growth Fund of America	 	 	 
YTD		9.59%	                   8.11%
1-year	15.91%	                   13.39%
3-year	10.65%	                   8.04%
5-year	12.91%	                   12.37%
10-year	9.00%	                   6.99%
Great comparison oldcomputerguy!!!

Best to you,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

McGilicutty
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Re: Investing with American Funds like betting on Tiger Woods

Post by McGilicutty » Mon Apr 24, 2017 8:26 pm

Who would bet on Tiger Woods these days?

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FiveK
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Re: Investing with American Funds like betting on Tiger Woods

Post by FiveK » Mon Apr 24, 2017 8:37 pm

McGilicutty wrote:Who would bet on Tiger Woods these days?
That seems to be the point.... :wink:

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Re: Investing with American Funds like betting on Tiger Woods

Post by ruralavalon » Mon Apr 24, 2017 8:47 pm

dwickenh wrote:An interesting article about American Funds recent claims of beating the index funds. I have seen several posts here about the same story.




https://assetbuilder.com/knowledge-cent ... iger-woods

Dan
Good article. The American Funds underperformed the Vanguard Total Stock Market Index Fund in the last 1, 3, 5 10, and 15 year periods.

The American Funds did better in earlier times.
oldcomputerguy wrote:What I find interesting is that the American Funds graphic shown in the article tries to benchmark everything against the S&P 500. But that's not appropriate in at least some of the funds cited. For example, the top-performing fund in the graphic (Growth Fund of America, ticker AGTHX) is a large-cap growth mutual fund. As such, it should be benchmarked against an index of growth stocks. As a proxy, I did a comparison between AGTHX and Vanguard's Large-Cap Growth Index Fund VIGAX. The numbers are quite a bit different from what the graphic would lead one to believe:

Code: Select all

 	Vanguard Growth
         Index Fund Adm	Growth Fund of America	 	 	 
YTD		9.59%	                   8.11%
1-year	15.91%	                   13.39%
3-year	10.65%	                   8.04%
5-year	12.91%	                   12.37%
10-year	9.00%	                   6.99%
A very good point as well.
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Re: Investing with American Funds like betting on Tiger Woods

Post by Carter3 » Mon Apr 24, 2017 9:22 pm

My family invested in American funds for years via a "family friend." It was the thing that the family did whenever they wanted to invest we went with this person. My first account was opened when I was 18. Over time I became skeptical and cautiously invested less and less In that particular account. I saw my account become stagnant despite growth in the market. The American fund loads and "family friend" adviser fees were eating me alive. A friend gave me a copy of investing for dummies and millionaire next door. 3 weeks later another friend introduced me to whitecoatinvestor and to the bogleheads website. Thanks to these friends, in addition to posts I saw from calm man, lafder, dhodson, jimb, watty and many others, I eventually saw the light and closed that account. My life was saved from so much agony that could have been in my future. Other family members were not so lucky because they had much more time and money invested. I personally feel that I can't trust the American funds company due to my past experience with a particular advisor. However, lesson learned. Thankfully I nipped my losses in the bud and didn't lose too much in the learning of that lesson. I am so thankful to my friends who opened my eyes and I'm so thankful to many of you here on bogleheads.

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Re: Investing with American Funds like betting on Tiger Woods

Post by DonCamillo » Mon Apr 24, 2017 9:54 pm

Of course, the other problem with the illustration is that American Funds has different funds. Since you can not know in advance which will do best, it is hard to say that they outperformed. If I start 100 funds with different strategies, I will probably have one or more that outperforms the market at a given time.

Survivor bias means that existing funds look better than they otherwise would, because many of the worst funds have gone out of business or been merged out of existence.
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Re: Investing with American Funds like betting on Tiger Woods

Post by GrandMasterBlaster » Mon Apr 24, 2017 11:00 pm

When my grandmother passed, she left about 30K each to myself, my brother, and my mother. Since I was in my early 20s at the time, my brother even younger, and my mom not financially savvy, the funds were invested through my grandmother's FA, who, of course, put our money into 5.75% load, ~.77% ER American Funds. There they've sat, doing what I thought was pretty well, until I was introduced to the Boglehead world.

I've since done some very eye-opening comparisons and calculations and realized just how much money we've lost to the FA. Needless to say, there are a couple letters in the mail that he's not going to enjoy reading. When Bogle says that high loads and ERs are easy to lose in the midst of double digit returns, I can attest to that from experience. Most recently after my epiphany, I've been crunching some of the numbers for my friend who is also invested in AF through an advisor. He keeps saying, "But they made 17% last year!" It's been a slow process, but I'm confident that I'll be able to convince my friend of the verity evident in the "humble rules of basic arithmetic." This article is going to help!

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Re: Investing with American Funds like betting on Tiger Woods

Post by TonyDAntonio » Mon Apr 24, 2017 11:07 pm

Earl Lemongrab wrote:I think it's a poor analogy. Tiger is tailing off because he's in athletics, where age and body condition matter a lot. Not in investing. If you want a sports analogy, pick betting on the UConn women's basketball team. The win year after year, but the team changes.

Note that I don't believe any managed fund is likely to outperform, even the "W darlings" from Vanguard.
UCON women's basketball team lost this year in the semis.

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Re: Investing with American Funds like betting on Tiger Woods

Post by Earl Lemongrab » Mon Apr 24, 2017 11:23 pm

TonyDAntonio wrote:
Earl Lemongrab wrote:I think it's a poor analogy. Tiger is tailing off because he's in athletics, where age and body condition matter a lot. Not in investing. If you want a sports analogy, pick betting on the UConn women's basketball team. The win year after year, but the team changes.

Note that I don't believe any managed fund is likely to outperform, even the "W darlings" from Vanguard.
UCON women's basketball team lost this year in the semis.
Indeed, but how teams ever get to the semis? I don't think American claimed their funds always beat everyone. Tiger at his peak didn't win every tourney either.

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Re: Investing with American Funds like betting on Tiger Woods

Post by Northern Flicker » Tue Apr 25, 2017 12:08 am

Classic example of painting the bullseye around the arrow. A large mutual fund company has lots of funds pursuing lots of strategies, so they pick the ones that pursued the particular strategies that happened to outperform during the period. Growth beat value and small caps beat large caps in the time period in question, so pick funds with growth tilts and funds that included small cap exposure and show a comparison to the S&P500. Fund companies have been playing this nonsensical game for decades.
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Re: Investing with American Funds like betting on Tiger Woods

Post by ruralavalon » Tue Apr 25, 2017 10:33 am

jalbert wrote:Classic example of painting the bullseye around the arrow. . .
. . .
What is it when we make an index the standard to measure fund performance?
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Re: Investing with American Funds like betting on Tiger Woods

Post by Northern Flicker » Tue Apr 25, 2017 12:12 pm

That is what they were doing. If you choose the index to use after the results are known, or cherry pick the funds that happened to beat a given index from a collection of funds using a variety of strategies after the results are known, it is deceptive advertising.
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Re: Investing with American Funds like betting on Tiger Woods

Post by ruralavalon » Tue Apr 25, 2017 12:14 pm

jalbert wrote:That is what they were doing. If you choose the index to use after the results are known, or cherry pick the funds that happened to beat a given index from a collection of funds using a variety of strategies after the results are known, it is deceptive advertising.
I agree.

But do you not see the irony?
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Re: Investing with American Funds like betting on Tiger Woods

Post by nedsaid » Tue Apr 25, 2017 5:19 pm

You have to take into consideration that American Funds are value oriented. When Value does well, the American Funds will do well. From 2009-2015, Value lagged the broad market. Indeed, the financial crisis and bear market of 2008-2009 was particularly hard on Value. No surprise that American Funds lagged. 2016 was a great year for Value and now that we are into 2017 we will have to see if the Value trend will continue.

Larry Swedroe did an analysis of American Funds and concluded that they are as good as it gets with active funds. He noted their problem with asset bloat which has made them in some cases closet indexers. His firm now primarily recommends Dimensional Fund Advisors but did at one time use the American Funds Group. In the aftermath of the crash after the 1990's internet and tech boom, American Funds did very well (as Value did well) and saw quite an influx of investor monies. This time period also saw a lot of former do-it-yourself investors flee to advisors. We now are seeing a trend of people going back to do-it-yourself. The difference was that the 1990's were the heyday of no-load active mutual funds and the current trend is based upon passive investing and indexing.
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Re: Investing with American Funds like betting on Tiger Woods

Post by nedsaid » Tue Apr 25, 2017 5:29 pm

Here is Larry Swedroe's analysis of the American Funds:

https://www.advisorperspectives.com/art ... erformance
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Re: Investing with American Funds like betting on Tiger Woods

Post by Northern Flicker » Tue Apr 25, 2017 7:15 pm

American Funds offers both value and growth funds. It enables them to pick whichever style outperformed in the near past to compare to a blended index in their marketing materials.
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