Capital Group (CG), the owner of American Funds, held a very rare meeting with the media, as reported by Bloomberg, Reuters and The Financial Times. What undoubtedly prompted the meeting:

The firm’s American Funds have lost $242 billion to withdrawals since the end of 2007, while Vanguard Group Inc., the largest index-fund provider, has attracted $607 billion, according to Morningstar Inc.

One way to counteract this shrinkage of AUM is to go on the offensive and promote an apparent dominance of active management over indexing. To that end:

Capital Group, based in Los Angeles, in a study released today, argued that its stock-picking mutual funds outperformed their benchmark indexes in the majority of almost 30,000 periods examined over the past 80 years. That included 57 percent of one-year stretches, 67 percent of 5-year periods and 83 percent of 20-year ranges.

The Capital Group study examined 17 of the company’s mutual funds that invest in equities or both equities and bonds. It measured their performance over every one-, three-, five-, 10-, 20- and 30-year period, on a rolling monthly basis, from Dec. 31, 1933, through Dec. 31, 2012.

Should investors care? Not really, because over such a long period of time, and especially in the last 15-20 years, the nature of investing has changed dramatically. There is more information available about both stocks and bonds, and this information is propagated with higher speed to a much broader investment audience, which makes markets more efficient and the job of an active manager more difficult. In addition, composite investment vehicles other than mutual funds — exchange-traded products (ETPs), tracking an ever-expanding spectrum of indices — have become readily available.

Finally, comparing just the returns of a mutual fund against those of its benchmark is largely meaningless because it does not fully adjust for the fund’s risk. Alpholio™’s methodology seeks to overcome this limitation by providing a dynamic, custom reference portfolio of ETPs for each analyzed mutual fund. Only the excess return of the fund over that of its reference portfolio, i.e. the RealAlpha™, counts.

According to the Bloomerg article:

Capital Group’s largest offering, the $123 billion Growth Fund of America, has seen its assets drop 31 percent in the five years ended Aug. 31. During that time the fund returned an annual average of 6.4 percent, compared with 7.3 percent for the S&P 500.

As an update to an earlier Alpholio™ post, here is how the risk-adjusted performance of this fund looked like since early 2005:

Cumulative RealAlpha™ for AGTHX

Despite a recent improvement, the fund’s performance in the last five years has been unimpressive. Small wonder many investors voted by withdrawing their assets.


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