1. finance
2. investing
3. funds
4. mutual funds

D4 Business |
2R
| SUNDAY, NOVEMBER 30, 2014
MutualFunds
INDEXING IS HOT,
BUT ACTIVE MANAGERS
HAVE THEIR PLACE
Your Funds
Chuck Jaffe
Syndicated columnist
One of the
oldest say­
ings in the
fund busi­
ness is that
you should
never con­
fuse a bull
market for brilliance.
That saying is usually
used as a warning about
active managers, where
their strategy looks wicked
smart even though they
mostly have benefitted from
watching the tide roll in.
Right now, however, it
might apply to indexing,
where the simplest of strate­
gies has been crushing the
active competition thanks
largely to the rising tide.
While that has sparked
plenty of “active manage­
ment is dead” discussions,
articles and talks, falling for
those arguments could be a
case of seeing a bull market
as providing a bulletproof
strategy.
That would be a mistake.
Jack Bogle — founder of
The Vanguard Group, the
world’s largest fund compa­
ny, and with it the first
Standard & Poor’s 500
index fund — recently told
me that “ ... 2014, so far,
happens to be one of the
great years for S&P 500
indexing.
“I hope nobody thinks it
will be that way forever
because it won’t be.”
Critics of active manage­
ment always talk about how
superior performers eventu­
ally “regress to the mean,”
so that over time their num­
bers are closer to the aver­
age than to what investors
see when the fund’s jockey
is on a roll.
That also happens to
index funds; at certain
times, they crush the com­
petition, at other times,
active managers pick­and­
choose their way to an edge.
Over longer stretches, the
ups­and­downs of the mar­
ket have made the index
return being a lot more
average.
Over the last three years,
21.5 percent of stock funds
have topped the index, and
the gap between the annu­
alized index return (19.7
percent) and the average
fund (17.6 percent) is thin­
ner.
Over the last five years,
roughly 37 percent of stock
funds have surpassed the
index, and the average fund
is within 0.8 percent of the
bench mark’s gain.
But over the last 10 years,
according to Morningstar,
more than half of domestic
stock funds (52 percent)
topped the S&P, with the
average fund returning 8.3
percent annualized, 0.1
points ahead of the index.
It’s important to note that
the results here lump the
various share classes of a
fund into one entity; in
some studies, each share
class is considered a sepa­
rate fund, overstating the
edge for indexing because if
the bench mark tops the
fictitious Goobersmoocher
Fund and its Class A, B, M
and Y shares, the index is
credited with five victories
instead of just one.
That goes a long way to
explaining why some stud­
ies — typically done by
indexers — show a much
higher edge for passive
management.
That shouldn’t convince
anyone to give up on index
funds, but rather to pick the
fund type they can live with
for the long haul.
Of late, indexing has been
easy; since the financial
crisis of 2008, every down­
turn has proved to be short­
lived.
When there is another
real bear market — and they
haven’t been repealed de­
spite the current bull now
being one of the longest­
lived of the last half century
— staying put won’t be so
easy.
Dan Wiener, chief execu­
tive at Adviser Investments
and editor of The Indepen­
dent Adviser for Vanguard
Investors, says the best way
to top the index is to find
terrific managers, and to
“Buy the managers, not the
fund,” but then to take the
long­term investing ap­
proach typically espoused
to work for indexing. That
means investing steadily
and consistently in good
times and bad.
“I don’t care what the
fund is called, I don’t care
what the fund company
says it’s for, I want great
managers,” Wiener said.
“You put a few of them
together and you’ve got a
great portfolio.”
It just doesn’t feel like it so
much at times, like now,
when the tide has showcased
the benefits of indexing.
“It’s right about now
when people are saying
‘Why should I buy an active
manager? Why not just buy
the index and be done with
it,’ ” Wiener said. “And my
answer is always the same:
‘Are you going to be happy
when that index drops 51 or
52 percent like it did in
2008­2009. ... You can ride
the indexes up, but you also
will ride them right back
down.’ ”
If an investor can’t ride
out that eventual downturn
— or can only do it if they
feel an active manager is
helping to protect them —
then it’s their investment
personality, and not which
type of fund wins the per­
formance war on paper,
that determines which type
of funds should be at the
core of their portfolio.
Chuck Jaffe is senior columnist for
MarketWatch. He can be reached
at [email protected] or at
P.O. Box 70,
Cohasset, MA 02025­0070.
Copyright 2014, MarketWatch
Weekly spotlight on mutual fund performance
Winners and losers: A mutual­fund scorecard
Fund Wkly % YTD %
obj return return
Biggest funds
American Funds A AmcpA p
American Funds A AMutlA p
American Funds A BalA p
American Funds A BondA p
American Funds A CapIBA p
American Funds A CapWGA p
American Funds A FdInvA p
American Funds A GwthA p
American Funds A IncoA p
American Funds A ICAA p
American Funds A N PerA p
American Funds A SmCpA p
American Funds A WshA p
BlackRock Instl StrIncoOpp
BlackRock Instl EquityDv
BlackRock Instl GlbAlloc r
Dimensional Fds EmMCrEq
Dimensional Fds EmMktV
Dimensional Fds USLgVa
Dodge&Cox Balanced
Dodge&Cox Income
Dodge&Cox IntlStk
Dodge&Cox Stock
DoubleLine Funds TRBd I
FPA Funds FPACres
Fidelity Freedom FF2020K
Fidelity Freedom FF2030K
Fidelity Invest Balanc
Fidelity Invest Contra
Fidelity Invest GroCo
Fidelity Invest LowP r
Fidelity Invest Puritn
Fidelity Invest TotalBd
Fidelity Spart Adv 500IdxAdv
Fidelity Spart Adv TotMktAd r
Frank/Temp Frnk A IncomA p
Frank/Tmp Frnk Adv GlbBdAdv
Harbor Funds CapApInst
Harbor Funds Intl r
Loomis Sayles LSBondI
MFS Funds I ValueI
Metro West Fds TotRtBdI
Oakmark Funds I EqtyInc r
Oakmark Funds I Intl
Oakmark Funds I Oakmark
Oppenheimer Y DevMktY
PIMCO Instl PIMS AlAsetAut r
PIMCO Instl PIMS AllAsset
PIMCO Instl PIMS TotRt
PIMCO Funds Instl Income
Price Funds BlChip
Price Funds CapApp
Price Funds EqInc
Price Funds EqIndex
Price Funds Growth
Price Funds MidCap
Price Funds N Horiz
Price Funds N Inc x
Price Funds Ret2020
Price Funds Ret2030
Price Funds Value
Schwab Funds S&P Sel
Vanguard Admiral 500Adml
Vanguard Admiral GNMA Ad
Vanguard Admiral HlthCr
Vanguard Admiral ITAdml
Vanguard Admiral ITGrAdm
Vanguard Admiral LtdTrAd
Vanguard Admiral MCpAdml
Vanguard Admiral PrmCap r
Vanguard Admiral STIGrAd
Vanguard Admiral SmCAdm
Vanguard Admiral TtlBAdml
Vanguard Admiral WellslAdm
Vanguard Admiral WelltnAdm
Vanguard Admiral WdsrIIAd
Vanguard Fds TotIntBInv
Vanguard Fds DivdGro
Vanguard Fds STAR
Vanguard Fds TgtRe2015
Vanguard Fds TgRe2020
Vanguard Fds TgtRe2025
Vanguard Fds TgRe2030
Vanguard Fds TgtRe2035
Vanguard Fds TgtRe2040
Vanguard Fds TgtRe2045
Vanguard Idx Fds TotlIntl
InstAX­fd r
AME Fd
EmMktI
EmMkGrI r
EmergAs r
Price Funds
Price Funds
Virtus Funds I
WM Blair Fds Inst
Fidelity Invest
Equity income
By NIRMALA GEORGE
The Associated Press
NEW DELHI — India’s
largest state­owned bank
will launch an Islamic equi­
ty fund next month aimed
mainly at attracting invest­
ments from the country’s
170 million Muslims.
The Securities and Ex­
change Board of India, the
country’s capital markets
regulator, recently allowed
the government­owned
State Bank of India and
three mutual funds to
launch Shariah funds.
An official said this past
week that the State Bank of
India is expecting to attract
an initial 1 billion rupees
($16.4 million) to the fund
which will launch this com­
ing Monday.
A large section of India’s
Muslim population remains
outside the banking system,
partly because Islamic law
known as Shariah prohibits
interest.
Shares of companies
linked to alcohol, tobacco,
gambling and casinos and
financial institutions that
earn interest would be
excluded from the fund.
“It will be a diversified
equity fund, including
large­cap, midcap and
small­cap funds,” said
Dinesh Khara, managing
director and CEO of the
bank’s SBI Mutual Fund.
“We will identify stocks
that meet the Bombay Stock
Exchange Shariah filter,”
Khara said.
India’s stock exchanges
have between 600 and 700
companies that are Shariah­
compliant.
The new fund has not
been opposed by All India
Muslim Personal Law
Board, an authority that
oversees the observance of
Muslim civil laws in India.
India is only the second
country outside the Islamic
world where a state­owned
bank is offering a Shariah­
compliant fund.
The U.K. issued sovereign
Islamic bonds in June.
Global Islamic banking
assets were estimated at
around $1.8 trillion in
2013.
XC
LV
BL
IB
BL
GL
LC
LG
BL
LC
GL
GL
LC
GT
EI
MP
EM
EM
LV
BL
IB
IL
LV
MT
MP
MP
MP
BL
LG
XG
MC
BL
IB
SP
XC
BL
WB
LG
IL
GT
LC
IB
BL
IL
LC
EM
MP
MP
IB
GT
LG
BL
EI
SP
LG
MG
SG
IB
MP
MP
LV
SP
SP
MT
HB
IM
IB
SM
MC
LC
SB
SC
IB
BL
BL
LV
WB
EI
BL
MP
MP
MP
MP
MP
MP
MP
IL
+0.4
+0.7
+0.7
+0.7
+1.1
+1.3
+0.6
+0.5
+0.6
+0.7
+1.6
+0.6
+0.3
+0.4
+0.4
+0.8
+1.2
+1.0
­0.6
+0.8
+0.6
+1.8
+0.9
NA
+0.7
+0.7
+0.7
+0.7
+1.3
+1.4
+0.5
+0.9
+0.7
+0.8
+0.7
NA
NA
+1.2
+1.9
+0.3
+1.2
+0.5
+0.4
+2.7
+0.8
+0.2
NA
NA
+0.8
NA
+1.3
+0.7
­0.2
+0.8
+1.4
+0.7
+0.7
+0.6
+0.7
+0.8
+0.8
+0.8
+0.8
+0.4
+2.0
+0.2
+0.8
0.0
+0.8
+1.8
+0.3
+0.3
+0.7
+0.8
+0.8
+0.5
+0.7
+0.8
+1.0
+0.7
+0.8
+0.8
+0.7
+0.8
+0.7
+0.7
+0.8
+12.8
+13.3
+9.3
+5.6
+8.8
+7.4
+9.6
+10.3
+9.6
+14.4
+5.5
+1.6
+11.4
+3.8
+8.7
+3.8
+3.4
+0.2
+9.3
+9.1
+5.8
+5.0
+10.6
NA
+6.8
+6.3
+6.9
+10.7
+10.1
+14.2
+7.3
+11.0
+5.9
+13.9
+12.5
NA
NA
+11.7
­2.3
+6.1
+10.1
+5.8
+7.0
­2.8
+11.8
+2.4
NA
NA
+5.2
NA
+10.8
+12.4
+6.8
+13.7
+10.5
+12.5
+4.8
+5.8
+6.9
+7.4
+13.1
+13.8
+13.9
+6.5
+29.4
+6.7
+6.1
+2.0
+13.5
+19.2
+2.2
+6.2
+5.8
+8.3
+10.2
+11.9
+7.9
+12.0
+8.3
+7.2
+7.7
+7.9
+8.0
+8.2
+8.2
+8.2
­0.6
XC
SP
XC
Vanguard Idx Fds TotStk
Vanguard Instl Fds InstIdx
Vanguard Instl Fds InsTStPlus
5­yr %
return
+16.2
+14.4
+12.4
+4.4
+9.6
+10.0
+14.1
+14.3
+11.8
+14.3
+11.5
+12.5
+15.3
+6.0
+13.1
+7.1
+4.7
+2.1
+17.6
+13.2
+5.2
+9.5
+16.2
NS
+10.8
+9.0
+10.3
+12.2
+15.7
+19.0
+16.5
+12.2
+5.4
+16.0
+16.4
NA
NA
+15.6
+6.8
+9.1
+14.7
+6.9
+10.2
+10.9
+16.9
+8.0
NA
NA
+5.1
NA
+17.9
+13.6
+13.7
+15.7
+17.1
+18.5
+22.7
+4.3
+11.0
+12.4
+16.6
+15.9
+16.0
+4.0
+20.9
+4.6
+6.1
+2.1
+18.5
+17.3
+3.0
+18.4
+4.0
+9.6
+11.5
+14.7
NS
+14.9
+10.6
+9.3
+10.1
+10.8
+11.4
+12.0
+12.3
+12.4
+5.5
Best performers
Neubrgr&Berm Fds GtChinEq I
ProFunds Inv Cl UltNasd100
Rydex Dynamic NasdStrH
Fidelity Selects Air
Fidelity Selects Multmd
ProFunds Inv Cl BiotechUlt
Fidelity Selects Electr
Fidelity Selects Biotch
AQR Funds MgdFutSt I
Vanguard Instl Fds ExDurTreas
Fidelity Advisor I Electronic
Fidelity Advisor A Biotech A
ProFunds Inv Cl USGovPlus
Invesco Funds A TechSectA
Invesco Funds Tech
ProFunds Inv Cl RealEst
Rydex Investor ElectInv
Rydex Investor Biotech
Putnam Funds Y CapSpec
Oppenheimer A GlbOppA
Kinetics Funds Internet
Shelton Funds GrtrChina
US Global Investors ChinaReg
Wasatch USTryFd
JPMorgan Sel Cls ChinaSel
Putnam Funds A EqSpec
Federated Instl IntlLeaders
Fidelity Selects Wireless
Henderson Glbl Fds IntOppA p
Prudential Fds A HlthSciA
Worst performers
+0.7 +12.4 +16.3
+0.8 +13.9 +16.0
+0.7 +12.6 +16.5
Fund Wkly % YTD %
obj return return
PR
SQ
SQ
SE
SE
SQ
TK
HB
SE
LU
TK
HB
GT
TK
TK
SQ
TK
HB
MP
GL
TK
PR
PR
LU
PR
MG
IL
TK
IL
HB
+13.4
+43.4
+43.7
+25.8
+8.0
+50.7
+32.9
+32.0
+6.4
+38.4
+32.4
+31.9
+31.0
+13.9
+13.3
+38.4
+22.0
+33.5
+14.6
­1.4
+2.3
+7.4
­0.1
+27.5
+6.3
+8.5
­0.8
+5.0
+1.3
+30.7
NS
+38.9
+39.0
+27.4
+23.4
+44.7
+18.6
+32.8
NS
+12.1
+18.0
+32.3
+9.1
+11.7
+14.5
+23.4
+11.3
+29.2
+21.9
+11.0
+17.9
+4.0
+0.6
+9.5
+6.3
+22.9
NS
+13.5
+7.5
+28.9
Fund Wkly % YTD %
obj return return
5­yr %
return
Direxion Fds NatRBull2X
Rydex Investor EnrgySer
ProFunds Inv Cl Oil&Gas
BlackRock A Eng&ResA
Fidelity Selects EngSv
Invesco Funds A Energy p
Rydex Investor Energy
Baron Funds Energy
ICON Fds Energy S
Waddell&Reed Adv EnergyA t
US Global Investors GlbRs
Fidelity Selects Enrgy
Fidelity Selects NatRes r
Fidelity Adv Foc A EnergyA p
Ivy Funds EnergyA t
Fidelity Selects NtGas
Voya Funds Cl A GlbNatRs
ProFunds Inv Cl PrecMetal
BlackRock A NatRsTA p
Frank/Temp Frnk A NatResA p
BlackRock A ACEngRsA
Ivy Funds GlNatRsA p
Vanguard Admiral Energy
Integrity Viking WillBasA p
Oppenheimer A Gold p
Price Funds New Era
GAMCO Funds GoldAAA
OCM Funds GoldInv t
Midas Funds Midas Fd t
Invesco Funds A GoldPrec p
SE
NR
SQ
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
SQ
NR
NR
NR
NR
NR
NR
AU
NR
AU
AU
AU
AU
+5.2
+4.5
+4.5
+4.2
+4.2
+4.2
+4.0
+3.9
+3.9
+3.9
+3.9
+3.8
+3.7
+3.6
+3.6
+3.6
+3.4
+3.4
+3.4
+3.3
+3.3
+3.2
+3.2
+3.1
+3.1
+3.1
+3.1
+3.0
+2.9
+2.9
5­yr %
return
­17.5
­13.4
­13.3
­12.8
­12.1
­11.6
­11.0
­10.9
­10.7
­10.6
­10.6
­10.5
­10.4
­10.4
­10.3
­10.1
­9.9
­9.8
­9.8
­9.7
­9.1
­9.0
­8.8
­8.7
­7.8
­7.6
­7.5
­7.4
­7.3
­7.1
­21.7 +0.1
­26.3 +1.9
­16.1 +8.4
­22.4
­1.6
­19.0 +4.5
­14.3 +2.9
­15.8 +4.6
­9.7
NS
­18.1 +3.8
­8.9 +6.2
­22.0
­0.8
­12.0 +6.3
­11.4 +4.5
­12.1 +6.1
­8.7 +6.2
­9.4 +3.6
­11.6 +1.5
­30.2 ­25.3
­11.6 +3.1
­17.2 +0.5
­11.5 +1.5
­10.8
­1.6
­11.4 +4.1
­9.8 +13.6
­17.2 ­15.0
­6.0 +3.6
­3.4 ­13.8
­7.3 ­13.5
­26.1 ­23.3
­7.7 ­12.4
Footnotes: e: Ex capital­gains distribution. f: Previous day{rsquo}s
quote. n or nl: No upfront sales charge. p: Fund assets are used to
pay for distribution costs. r: redemption fee or contingent deferred
sales load may apply. s: Stock dividend or split. t: Both p and r. x: Ex
cash dividend. NE: Data in question. NS: Fund did not exist at the
start date. NA: No information available.
Key to abbreviations and footnotes:
Fund objectives: AB: Long­term top­grade corporate and govern­
ment bonds. AU: Gold oriented. BL: Balanced. EI: Equity income.
EM: Emerging markets. EU: European region. GL: Global (includes
U.S.). GM: General municipal bond. GT: General taxable bond. HB:
Health and biotech. HC: High­yield taxable bond. HM: High­yield
municipal bond. IB: Intermediate­term investment­grade corporate
bond. IG: Intermediate­term Treasury/government debt. IL:
International (outside U.S.). IM: Intermediate­term municipal bond.
LC: Large­cap core. LG: Large­cap growth. LT: Latin American. LU:
Long­term Treasury/government debt. LV: Large­cap value. MC:
Mid­cap core. MG: Mid­cap growth. MP: Mixed portfolio (stocks and
bonds). MT: Mortgage. MV: Mid­cap value. NM: Insured municipal
bond. NR: Natural resources. PR: Pacific region. SB: Short­term
investment­grade corporate bond. SC: Small­cap core. SE: Sector
(specific industries). SG: Small­cap growth. SM: Short­term munici­
pal debt. SP: S&P 500. SQ: Specialty diversified equity. SS: Single­
state municipal debt. SU: Short­term Treasury/government debt.
SV: Small­cap value. TK: Science and technology. UN: Unclassified.
UT: Utility. WB: World bond. XC: Multi­cap core. XG: Multi­cap
growth. XV: Multi­cap value
5­year % return: Annualized performance over the past five years.
Top 5 mutual funds by objective, year­to­date % return
Emerging markets
India bank launching
Islamic stock fund
HOW
TO BEAT
THE INDEX
Fund Tracker
ValLdrs
Utilities p
ParnEqty
DivInco Y
B&GInGr I
Paydenfunds
Invesco Funds A
Parnassus Funds
BMO Funds
AAM
Health | biotech
Biotech
Health
Biotch
Biotech A
HlthCrA r
Rydex Investor
Fidelity Selects
Fidelity Selects
Fidelity Advisor A
Fidelity Adv Foc A
Global
Lazard Instl
Vanguard Fds
Cohen & Steers
USAA Group
Price Funds
GblInfra I
GblMnV Inv
GblInfra I
CapGr
InstGlbGE
International
Guggenheim Funds
Virtus Funds I
First Investors A
Wasatch
Fidelity Invest
Large­cap core
Vanguard Fds
Vanguard Admiral
JPMorgan Sel Cls
PNC Funds
BMO Funds
WldEqIncA
ForOppI
IntlA p
IntlOppt r
Canada
YTD %
return
Mid­cap core
+14.5
+13.7
+11.7
+8.3
+7.9
Davenport Funds
Longleaf Partners
Dreyfus
JPMorgan Sel Cls
Vanguard Admiral
YTD %
return
Small­cap core
+15.5
+15.4
+14.1
+13.9
+13.8
Hennessy Funds
Invesco Funds A
Lazard Instl
Forum Funds
Vanguard Fds
YTD %
return
Natural resources
+33.5
+32.4
+32.0
+31.9
+31.9
Invest Managers
Invest Managers
Oppenheimer A
Oppenheimer Y
Center Coast
YTD %
return
Pacific region
+18.0
+14.1
+13.5
+11.2
+10.6
Matthews Asian
Eaton Vance A
Neubrgr&Berm Fds
Price Funds
Invesco Funds A
YTD %
return
Science | technology
+7.1
+7.0
+6.2
+5.9
+5.6
YTD %
return
PrmcpCor +19.7
PrmCap r +19.2
IntrdAmer +16.6
LCCrEqI p +16.4
LowVolEq I +16.3
Fidelity Selects
Fidelity Advisor I
Price Funds
Columbia Class A
Columbia Class A
EqtyOpps
SmCap
ActMidA
IntpdMCp
MCpAdml
Sector
+15.2
+14.9
+14.9
+14.7
+13.5
Fidelity Selects
Fidelity Selects
Fidelity Selects
ICON Fds
Fidelity Selects
YTD %
return
Balanced
CorGrow O +12.1
SmallC p
+9.9
USSmMid I +9.7
GoldenSCC +8.4
StrSCEqInv +8.3
MLP&Engy
MLP&EnI I
StlpthAlpha
Alpha Y
MLPFoc I
Electr
Electronic
GlbTech
SelComm A
GlobTech
SGenGld p
Gold t
GoldAAA
PrecMtlA
GoldInv t
Wells Fargo Adv A
Wells Fargo Adv A
Meeder Funds
Meeder Funds
Price Funds
YTD %
return
Trans
Air
ConStap
ConsStapl
CstHo
IdxAstAll A
DivCapBldr
AggGr p
DynaGr p
CapApp
Intermediate bond
+16.8
+16.0
+13.7
+11.0
+10.8
Invest Managers CutwSelInc
Dimensional Fds ITExQual
MorganStanleyInst CorPlsFxI
Western Asset
CorePlus I
BMO Funds
CorpInco I
YTD %
return
Long­term bond
LTBnd
LTGrAdml
ExtDrGS4
ExtDurI
CorpInc x
Vanguard Idx Fds
Vanguard Admiral
GuideStone Funds
Del Inv Instl
Price Funds
YTD %
return
Long­term U.S.
+32.9
+32.4
+28.1
+24.1
+22.4
VanguardInstlFds
Wasatch
Vanguard Admiral
Fidelity Spartan
Price Funds
YTD %
return
Mortgage
­3.2
­3.3
­3.4
­7.1
­7.3
Managed Acct Srs
Legg Mason A
AMG Managers
Deutsche Trust
SEI Portfolios
+32.3
+25.8
+17.2
+14.2
+14.1
YTD %
return
YTD %
return
IndiaInv r +63.9
GrIndia t +43.5
GtChinEq I +13.4
N Asia
+11.6
AsianPac p +9.6
Gold oriented
First Eagle
Tocqueville Fds
GAMCO Funds
Wells Fargo Adv A
OCM Funds
YTD %
return
ExDurTreas
USTryFd
LTsyAdml
SpLTTrAd r
USTLg x
+16.7
+13.8
+13.1
+12.9
+12.4
YTD %
return
+8.8
+8.5
+7.8
+7.6
+7.6
YTD %
return
+17.8
+16.4
+15.8
+15.2
+8.5
YTD %
return
+38.4
+27.5
+21.9
+21.8
+20.8
YTD %
return
US MrtgInst
WAMtgBkA
IntDurGv
GNMA S
GNMA A
+7.6
+6.5
+6.5
+6.5
+6.5
Investing
Scott Burns
Syndicated columnist
LOS
ANGELES
— A guard,
in suit and
tie, asks me
to pop the
trunk of my
rental car.
Then I can
enter the underground
parking lot of a tall build­
ing in downtown L.A.
This is the headquarters
of Capital Research and
Management (thecapital­
group.com). It is the third­
largest fund complex, with
$1.25 trillion under man­
agement. But most people
know it as the American
Funds group.
Upstairs, another guard
confirms my appointment.
Soon I am admitted to the
elevator banks that will
take me to the 53rd floor.
I’ve come to speak with
two researchers from the
firm, Thomas Lloyd and
Stephen Deschenes. They
directed two fascinating
research studies. The first
demonstrates that the
equity­focused funds man­
aged by Capital Research
have beaten their target
index most of the time —
for decades.
Yes, you read that right.
Managed funds that beat
their comparative index.
And they did it often
enough, over long periods
of time, to be significant.
The second study asked
a simple question. They
confirmed data points on
mutual­fund manager
ownership by going
through some 20,000 SEC
filings. Here’s their ques­
tion: How can you screen
for superior actively man­
aged funds? The usual
answer is: You can’t — at
least not with any reliabili­
ty. But they found two
questions that improved
the odds massively.
The questions:
• Does the fund have
expenses lower than 75
percent of other funds?
• Do the fund managers
have significant ownership
of fund shares?
They screened a total
universe of 2,466 domestic
equity funds. In it, they
found 509 funds with costs
in the lowest quartile for
their category. They also
found 447 funds with
highest manager owner­
ship. But only 85 funds had
both low costs and high
manager ownership.
Their data included
every 10­year period from
1994 to the end of 2013. In
it, they found that only 27
percent of all active funds
beat their index.
That’s the kind of figure
you’d expect from past
fund research. Dozens of
studies have shown that
managed funds can beat
their index only about 30
percent of the time.
But the odds were better
for low­expense funds (44
percent) and high manag­
er ownership funds (71
percent).
And if you combine the
two measures, a stunning
100 percent of the funds
beat their index.
Yes, it just so happens
that low expenses and high
manager ownership char­
acterize the American
Funds group.
This makes their funds a
good choice if you want to
have the advice of a tradi­
tional broker. I have sug­
gested this many times in
columns.
The hard part is whether
that traditional broker will
suggest American Funds.
More likely, the broker will
offer many less tested and
far more expensive prod­
ucts. Why? Simple.
The other products will
deliver more revenue to
the broker and to his firm.
As investors, you and I
face a problem. Thousands
of brokers are flogging
expensive funds with little
management ownership.
These funds, most likely,
will fail to beat a simple
index.
Questions:
[email protected]
Copyright 2014,
Universal Press Syndicate