9
Morningstar FundInvestor
January 2
014
dumped into another fund at some point during
those three decades.
For the shortest periods, say three years and less,
survivorship is much less of an issue, so that the true
results are close to the indicated percentages. Thus,
when looking out for a year or two, choosing between
an active fund or a no-cost index fund (if such a
thing existed) is not a big deal. It’s a roughly
50
/
50
proposition.
Overall, the figures cast doubt on the popular notion
that actively managed stock funds are dangerous to
one’s financial health. They might not be particularly
helpful, as a general rule, but not being particularly
helpful is different from causing financial cancer.
2
) The persistency of all active funds is disappointing.
The percentage of winning actively managed stock
funds that were able to beat the index a second time
was similar to the overall success rate for actively
run funds for periods of five years and less but fell off
the cliff for the
10
- and
20
-year horizons. (The big
improvement for
30
years is surely a fluke caused by
a very small sample size.)
Sequoia
SEQUX
, famously,
has been strong decade after decade. But the indus-
try can boast few such funds. Most funds shine for a
while, then fade into mediocrity. The lack of persis-
tency is the biggest strike against active management.
3
) The success percentage (and persistency) for
American Funds is excellent.
No surprise there. American Funds has done well with
its stock funds, over all time periods. Unlike with the
all active list, these results are not aided by survivor-
ship effects, as the organization has only killed off
one stock fund during its history—
50
years ago. For
the long-term owner, holding an American Funds
stock fund has consistently been a sound decision.
4
) What about risk?
The study only lightly touches the subject. There’s a
brief look at the U.S. equity subset, showing that
the American Funds are about as volatile as the S
&
P
500
Index and “like funds of other active managers”
(I’m not quite sure what that means) are substantially
riskier. That suggests that if the study were done on
a risk-adjusted basis, so that Sharpe ratios rather
than total returns were the measure of success, all
active funds would have fared worse and American
Funds would have looked better.
5
) Is American Funds’ success old news?
In aggregate, hedge funds have great
30
-year figures—
but that disguises the fact that they were terrific for
the first
20
years, then mediocre since. The same
might be true of American Funds; indeed, it probably
is true given that the company now faces significant
redemptions for the first time in decades.
That stands to reason, but it doesn’t seem to be so.
While American Funds didn’t withstand the
2008
market crash as well as most expected, which led
to bad publicity and investor disappointment, the
company’s stock funds have nevertheless kept pace
with the indexes for the past five years and beaten
them over
10
. In fact, in a hypothetical exercise com-
paring the growth of $
100
,
000
placed in a basket
of American Funds and $
100
,
000
placed in an index
basket, American Funds fares best in recent years.
It hangs around with the indexes through the
1980
s
and
1990
s, then vaults past them beginning in
2000
.
I suspect American Funds will recover its sales mojo.
Fund performance has been good, and memories of
2008
will fade. Other active stock-fund managers will
continue to struggle, even if Capital Group success-
fully spreads the word that active managers as a
whole are reasonably safe and acceptable alterna-
tives to indexes. Safe and acceptable beats being
financial poison, to be sure, but it’s not enough incen-
tive to get investors to change their current habits.
œ
Contact John Rekenthaler at
