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American Funds Throws Gauntlet to Passive Investors

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Watch out, Vanguard. Capital Group wants the active investing crowd to up its game.

The group, which has about $1.2 trillion of investor and institutional assets under management (or roughly half of Vanguard’s global AUM) in its American Funds and other products, released a study on Monday highlighting how often its funds have beaten the S&P 500. It’s also beefing up its sales force in the hopes of stemming recent outflows and finding more ways to work with financial advisors.

According to Capital Group, the American Funds general sales force, which works with all types of financial advisors, will be expanded to 145 from 115 over the next six to eight months. The organization also has a separate group of institutional wholesalers, 10 of whom focus on the RIA channel.

“Recently, conversations about investing have become too narrowly focused,” said James F. Rothenberg, chairman of Capital Group, in a press release. “It has become apparent that there is only one voice out there, a voice contending that passive investing is more attractive. We need to challenge that assumption.”

Numbers in Focus

Overall, actively managed funds outpaced the S&P 500 47% of the time from 1993 to 2012. But, Capital Group believes, investors have a lot to gain by focusing on active managers that “add value” and beat the benchmark.

“Most of both the academic work and the cited references about passive investing use comparisons that are extraordinarily broad,” Rothenberg said. “They take the whole mutual fund business and say that, on average, active managers do not outperform. However, we believe that if you look beneath all the data and ask the question not as, ‘Do money managers underperform?’ but turn it around the other way and ask, ‘Are there certain managers who show a sustainable ability to outperform?’ the answer is ‘yes.’”

Capital Group’s research looked at the results of 17 equity funds, excluding those in the moderate and world-allocation categories. Looking at one-year average performance, it found its funds topped the S&P 500 57% of the time between 1934 and 2012. That figure rose to 67% for a five-year average and 98% for a 30-year average.

Since 2003, the average one-year performance of equity-focused American Funds outpaced that of the S&5 500 58% of the time. The three-year results topped the index 77% of the time.

”The choices investors and their advisors make concerning the investment managers they hire can have important long-term consequences,” Rothenburg said.

Comparing retirement portfolios with $500-a-month contributions over the past 30 years, an investor in American Funds (after deducting fees and expenses) would have had nearly $1.1 million versus about $805,000 for the index-dominated portfolio — a difference of about 35%.

“There can be an active advantage, and we think Capital can provide that,” Rothenburg said.

“We think there may be some potential long-run hidden costs to investors who simply buy index funds for their equity allocations, and we’d like to see investors be in a position to evaluate their choices with the benefit of more information,” he said. “For example, in the work we do in our funds, if we think the market is a little rich, we can change the mix of what we own, we can go to cash, we can do a variety of things to try to protect the shareholder’s exposure. Index funds cannot.”

In the Capital Group white paper, the asset manager notes the views of Morningstar global research chief Don Philips, who said, “The active-versus-passive debate has been grossly overplayed to the detriment of many fine, actively managed fund shops and to intelligent investment discourse.”

Pushing for a Turnaround

Still, American Funds will most likely need to embrace a range of strategies to convince advisors and investors of the merits of its products.

While the Growth Fund of America (AGTHX) is outpacing the S&P 500 over the past 12 months, with returns of 24%, the American Mutual Fund (AMRMX) is underperforming the index with returns of about 17% versus 17.5% for the S&P, according to data from Yahoo Finance on Monday.

In its analysis of August fund flows, Morningstar found that American Funds lost $1.9 billion, bringing total 2013 outflows to $11.6 billion. In the same month, Vanguard attracted $552 million in flows and has seen $50.8 billion of inflows this year.

As of Aug. 30, Vanguard has about 17.5% of the fund market (excluding funds of funds and money-market funds), while Fidelty has 10.5%, American Funds 10% and PIMCO 5.4%, the research groups says.

In early summer, Los Angeles-based Capital Group began sharing more information with advisors about attribution analysis and other portfolio information, while soliciting more insights from advisors about their portfilio-building techniques. The first phase of this transparency-boosting initiative is under way, the company says, and it includes passing along reports and data to reps via e-mail communication and other methods.

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