A recent article from Index Universe takes on a white paper from American Century (AC), trying to expose “lies” from the paper. In doing so, the article starts with a comparison of returns of sample AC funds to those of DFA and Vanguard funds in nine “asset classes.” The article says that
“For each asset class, we used all funds fitting a particular category and chose the lowest-cost version of each fund, as long as it had a record of 10 years or more.”
First, there is a problem with assigning AC funds to these asset classes. For example, four “Large Growth” and one “Large Blend” AC funds are assigned to a US Large class, for which the references are “Large Blend” funds from DFA and Vanguard (all quoted categories from Morningstar). Strangely, the next class, US Large Value, differentiates between value and growth types of AC funds.
Similarly, two “Small Growth” and one “Small Blend” AC funds are in a common US Small class, for which the references are “Small Blend” DFA and Vanguard funds. In the International Large class, a “Foreign Large Growth” AC fund is compared to “Foreign Large Blend” references. Comparisons of AC funds to wrong benchmark funds are inaccurate, even though the conclusions might be the same otherwise.
Second, in some asset classes the Investor instead of Admiral or Institutional shares are used for Vanguard reference funds, even though the latter have been available over the past ten years and have lower expenses. Therefore, the choice of Vanguard reference funds is inconsistent with that of AC funds.
Third, the DFA funds used as references are not available to retail investors, and some are even closed to new investors. Therefore, the comparison is less meaningful for those individual investors who are not served by financial advisors offering DFA funds.
Finally, the single-fund DFA and Vanguard benchmarks do not necessarily exhibit the same volatility characteristics as the equal-weighted portfolios of AC funds in each respective asset class.
All that aside, only one of the representative AC funds, American Century Equity Income (ACIIX), currently carries the highest five-star rating from Morningstar; the rest of the AC funds are rated two to four stars. Let’s take a look at this fund from the Alpholio™ perspective:
In the past eight years, with the exception of a short period at the onset of the recent market downturn, the cumulative RealAlpha™ for this fund was essentially flat. As the AC paper states:
“Active managers vary in skill and competency, so it is essential to engage a manager that outperforms on a consistent basis.”
Investors should heed that advice also in the case of AC funds.