8
Capital Group is on a
PR
tour. Making the media
rounds does not come naturally to the company,
any more than winning the Rose Bowl does to Cal
Tech, but something had to be done. For the past
half-decade, at the very least, index-fund proponents
and exchange-traded fund marketers have owned
the public discussion. As a result, active stock-fund
managers are typically portrayed in the general
media as useless at best, and harmful at worst.
As the largest such manager, via its American Funds,
Capital Group has had the most to lose. And lost,
it has. Over the past few years, it has shed more than
$
200
billion of assets in net redemptions, most from
its equity funds. Meanwhile, index funds and
ETF
s
have gained more than $
1
trillion of new monies. The
Empire has received a thrashing.
Now it’s telling its side of the story, via a study enti-
tled “The active advantage: A history of delivering
persistent above-benchmark returns.” (Perhaps not
the most engaging of titles.)
Ostensibly, the study showcases the strengths of
active management in general, as opposed to just
those managers working at American Funds. How-
ever, that’s not how the numbers play out. They
show American Funds to be good. The rest of the
industry, not so much.
The most notable aspect of the study is its long time
horizon. Capital Group begins the analysis in
1934
.
From that point forward, it looks at all rolling one-,
three-, five-,
10
-, and
30
-year (!) time periods,
comparing the total returns of a) active stock funds
overall and b) only those from American Funds,
against the returns of a relevant index. It’s not the
perfect study, but it’s a good starting point because
it has a whole lot of data points and the results
are easy to interpret.
Capital Group also looked at something it calls persis-
tency, which measures the percentage of times that
a winning fund (that is, a fund that beat an index) also
won over the very next time period of equal length.
As is customary for performance studies, whether
generated by American Funds, Morningstar, or
academic researchers, fund returns are calculated
net of all ongoing fees (that is, annual expenses)
but do not include the effects of load charges.
Five Thoughts
1
) The success percentage for all active funds is much
higher than generally believed.
For the longer time periods, this is due largely to
survivorship issues, as the most successful actively
managed stock funds tend to stay in existence,
and the less successful are merged away. (The same
holds true for index stock funds.) Realistically,
somebody purchasing a random stock fund at any
point in the past
78
years and then holding it for
the next
30
years would not have had a
38%
chance
of outgaining the relevant index. There’s a very
good chance that our investor would have been
The Empire Strikes Back
Morningstar Research
|
John Rekenthaler
Success Percentage
All Active Funds
American Funds
Time Period
Success %
Success %
1 Year
47
57
3 Year
50
62
5 Year
51
67
10 Year
51
73
20 Year
42
83
30 Year
38
98
Source: Morningstar
“Persistency” Percentage
All Active Funds
American Funds
Time Period
Persistency % Persistency %
1 Year
53
62
3 Year
50
60
5 Year
51
64
10 Year
42
64
20 Year
28
80
30 Year
49
96
Source: Morningstar
