American Funds Growth Fund of America (ticker symbol AGTHX) is a mutual fund with approx. $116.8 billion in assets managed by a team of a dozen portfolio managers. The fund is one of the largest in the industry. Currently, Morningstar rates the fund Three Stars / Bronze in the US OE Large Growth category and says “This fund’s large asset base weighs down on its potential.” Let’s appraise the fund’s performance using the Alpholio™ methodology.
First, the total return chart, which reflects a reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:
The chart shows that the fund outperformed the reference portfolio from early 2005 through the first half of 2008. After that, the fund’s performance was comparable to that of the reference portfolio.
This is further illustrated by the cumulative RealAlpha™ chart:
An investor who bought the fund at the beginning of 2005 lost practically all of the cumulative RealAlpha™ by the end of 2008. Subsequently, the trend of the cumulative RealAlpha™ was flat to negative.
The overall performance statistics are unimpressive:
The fund’s volatility, measured by a standard deviation of monthly returns in the entire analysis period, was slightly higher than that of the overall stock market. The volatility of the reference portfolio matched that of the fund, which tends to indicate that the fund was well diversified and held securities present in the reference exchange-traded products (ETPs). The overall discounted annualized RealAlpha™ figure was close to zero, which underscores the difficulty in differentiating a fund of such an enormous size (see the recent article on “active share” from Barron’s).
The following chart demonstrates the use of smoothed RealAlpha™ to automatically generate a hypothetical trading signal:
The analysis starts with an assumption that the investor initially bought the fund in early 2005 and intended to hold this investment indefinitely, i.e. at least through early 2013. The blue curve depicts the cumulative RealAlpha™ in that entire period. Since there is some degree of high-frequency oscillation in that curve, its longer-term trend can be elicited from a smoothed approximation by an exponential moving average (EMA), depicted by the green curve. Subsequently, a simple decision criterion is applied to determine whether the investment in the fund should be retained. As long as the fund generates positive monthly increments to cumulative RealAlpha™, the investment in the fund is considered beneficial. Conversely, if the fund’s cumulative RealAlpha™ begins to consistently decrease, the investment is no longer considered attractive.
The signal would allow the investor to avoid a period of the fund’s underperformance from the end of 2008 through the third quarter of 2011. Please note that the most recent positive performance trend of the fund may not be sustained in the long run, as the cumulative RealAlpha™ curve started to turn down in the last couple of months.
The following chart shows the major investment “themes” of the fund over time:
In the analysis period, the fund held equivalent equity positions in JKE (iShares Morningstar Large-Cap Growth ETF; average weight of 24.6%), IVE (iShares S&P 500 Value ETF; average weight of 17.1%), IGE (iShares North American Natural Resources ETF; 9.8%), IWP (iShares Russell Mid-Cap Growth ETF; 9.1%), and VHT (Vanguard Health Care ETF; 6.2%). The cash equivalent position was represented by SHY (iShares 1-3 Year Treasury Bond ETF; average of 11%).
For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in EWJ (iShares MSCI Japan ETF; average weight of 3.9%). This position implies that while the fund may not have actually held any stocks of Japanese companies, it held securities with a significant exposure to the Japanese market, such as US-headquartered multinationals. Similarly, the fund had an equivalent position in EWT (iShares MSCI Taiwan ETF; 2.9%). The fund may invest up to 25% of its assets in securities of foreign-domiciled issuers.
The above analysis demonstrates that, for the most part, the performance of this large fund could have effectively been replicated by a relatively small collection of ETPs. While the current expense ratio of this fund is a comparatively low 0.71% vs. the 1.25% average in its category, class A of the fund’s shares is burdened with a 5.75% front load. Prospective investors should take this sales charge into account along with the RealAlpha™ statistics of the fund when making an investment decision.