New American Funds Study Shows How To Identify Mutual Funds With A History Of Beating Indexes And Creating More Wealth

LOS ANGELES, Oct. 9, 2014 /PRNewswire/ -- Two simple screens, low expense ratios and high manager ownership, can help investors identify actively managed mutual funds that have outpaced passive investments over the past two decades, according to an in-depth study released today by American Funds.

The study used data provided by Morningstar, an independent research firm, to examine 3,037 actively managed funds over a 20-year period ending in January 2014. Focusing on funds whose expense ratios were in the lowest quartile and firms whose manager ownership was in the highest quartile reduced those 3,037 funds to just 105 -- 85 actively managed large-cap domestic equity and 20 actively managed large-cap international equity – all of which outpaced the broad market averages over that period.

"Our research shows that a select group of managers can consistently add value over the long term and, just as importantly, that investors can identify those managers using publicly available information," said Tim Armour, a portfolio manager and chairman of the Management Committee at Capital Group, which manages $1.4 trillion for individuals and institutions, including the American Funds family of mutual funds.

"Using two screens, low expenses and high manager ownership, gives investors a good place to start their search for an active manager that can outpace the broad market indexes over time and help them reach their investment goals," Armour said.

"Low expenses mean investors have more of their money working for them. High manager ownership means that managers are investing significant amounts of their own money in the portfolios they manage. They have 'skin in the game' and, not surprisingly, the funds tend to do better."

Information on expense ratios and manager ownership is typically available on fund company websites (see www.americanfunds.com), and available through firms such as Morningstar or from financial advisors.

Choosing an active manager that can outpace the broad market can make a significant difference in how much money investors are able to accumulate for retirement -- and how long their money lasts in retirement, according to American Funds which offered two scenarios to illustrate the point, with the caution that past results are not predictive of the future.

In the first, a lump-sum $100,000 was invested in two portfolios in January, 1994 with a 50/50 allocation to U.S. and international large-cap equities. One portfolio was all ETFs, while the other was composed entirely of actively managed funds in both the highest ownership and lowest-cost quartiles of the Morningstar universe. Twenty years later, the actively managed portfolio would have grown to $551,409 – 31% more than the ETF portfolio, the company said.

The second scenario began with a $500,000 nest egg and made annual withdrawals of 5%, increasing that amount by 3% each year to account for inflation. Over 20 years, the actively managed portfolio would have generated 57% more wealth than the portfolio invested in ETFs, American Funds said.

Investors who are relying on 401(k) plans for their retirement may want to review which mutual fund families are being offered in those plans, Armour said, and look specifically at the funds' expense ratios and manager ownership information.

"There are a number of fund families – American Funds is among them – that keep their costs low and have portfolio managers who invest alongside their shareholders," Armour said. "Rather than simply going along with the notion that passive investments are the only answer, investors would benefit from using these two screens. Active managers that have the potential to consistently outpace are available, and the value those managers may be able to add can make a significant difference to investors in achieving their retirement objectives."

The ETF portfolio represents an equally divided allocation between a widely used S&P ETF and MSCI ACWI ex USA ETF. For years in which MSCI ACWI ex USA ETF was not in existence, index returns were used, net of the ETF's fees as of 2013. The ETFs selected were the largest ETFs tracking the S&P 500 and MSCI ACWI ex-USA indexes in their respective categories as of December 31, 2013, among Morningstar's universe of large-cap investments. The actively managed portfolio represents a cross-section of the least-expensive and highest manager ownership quartiles (50% U.S., 50% foreign). The U.S. allocation is equally weighted among 85 active U.S. equity managers; the foreign allocation is equally weighted among 20 active international equity managers.

Contact:
Chuck Freadhoff, [email protected], (213) 486-9988 (310-991-5166)
Tom Joyce, [email protected], (213) 615-0514, (630) 418-5860

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SOURCE American Funds