American Funds
This is a subject that comes up with many of my friends in the business and I would like to hear other opinions.
Are the American Funds bulletproof ? Obviously their record speaks for itself, but nothing in this industry lasts forever. Or can it ?[quote=GT Key]This is a subject that comes up with many of my friends in the business and I would like to hear other opinions.
Are the American Funds bulletproof ? Obviously their record speaks for itself, but nothing in this industry lasts forever. Or can it ? [/quote] Of course there not bulletproof. They have a good management style that buys value stocks while providing downside protection.. Just depends on the client. Ask your wholesaler to come and discuss the funds with you. Miss jWashington Mutual doing 1% in 1999 is not bulletproof. American funds says, “I have never had to apologize for an American Fund.” I have. They are very good funds, especially in a down market but no fund family is bulletproof.
By Bulletproof I don’t mean they will never have a bad year. I also know their style means some of their funds will never shoot the lights out.
What I am talking about is from a size and popularity standpoint can they continue to post above average returns and avoid a Putnam-Federated type of blow up.I doubt they will ever “blow up”. They have too many safeguards in place (namely their multiple portfolio counselor system for managing funds).
I also think their investment philosophy prevents them from having wild swings (up or down). They aer very conservative, value investors. Most fo the "blow ups" we witness are due to excessive risk takers on the growth side. But they do run the risk of being very mediocre, especially for younger, more aggressive investors. For retirees and conservative people, they are great - probably one of the best.A well diversified portfolio of American Funds - is bullet proof.
Can you be well diversified owning only American Funds??A well diversified portfolio of American Funds - is bullet proof.
NO.
Yes
Can you be well diversified owning only American Funds??[/quote] You can - you just have to really dive into it. But I find that being completely diversified with AMF includes some of their less-than-great funds (i.e. Growth Fund, Small Cap World,etc.). I prefer to start with AMF as my core for 60-80% of my portfolios, then using other funds as satellites.[quote=apprentice]A well diversified portfolio of American Funds - is bullet proof.
donatello - do you now disagree with EVERYTHING that Jones says?
It is true that you can't get real estate, or gold, or any number of other sector funds. But to say you can't build a diversified portfolio at American funds is just stupid. For the record, I build my portfolios similarly to B24. An American Funds core with some others thrown in for spice.[quote=iceco1d]
No fund family is bullet proof. You can diversify away non-systematic risk [quite easily] with 1 fund family.
However, you still run the risk of the fund family "going Putnam" on you, if you stick with one. [/quote] Agreed. However, if there was one fund company that I am LEAST concerned about systemic risk, it would be American. I like their process, and unless their philosophy and process changes, I think you remain relatively safe. The problem with the Putnam's of the world is that they were chasing returns and had "star manager" issues (this happens many places - look at Fidelity). Again, I think the biggest risk with American Funds is slipping away into mediocrity. And unfortunately, that's not always something you can recognize until years have passed. You look at their returns from 97-99. Pretty lethargic (actually pretty poor comapred to the market). Everyone was tolling their bells back then. They turned it around and proved that they hold up extremely well in bear markets '00-02). But what if their returns from 2003-2006/2007 had lagged the market? Then they would have been done. They would have just wasted a decade by ringing up modest returns at best. It is always important to see what happens during boom and bust times with them. Actually, right now, I am not overly impressed with the last 6 months. I would have expected them to hold up a bit better. But there's much worse out there.American is heavily skewed towards value and the value play has been good the past 6-7 years. As growth becomes a leader, I think American will lag, just as they did at the end of the last decade, IMHO.
Nothing is bulletproof, what kinda question is that?!?!? Caibx is down this year, aivsx is down, agthx is down. Not that that is way out of line in a bad market, but it’s not bulletproof either. It’s incredibly dangerous to even think that way.
I would think it would be wise to define bullteproof. I’ve never sold a single American Fund with the promise that it will never go down. If by bulletproof you mean will never go down, then you are correct. They are not bulletproof.
I had a wholesaler, not from American Funds, tell me that AMF does a great job managing statement risk. He defined statement risk as the risk that your client is going to open up his quarterly statement and decide to fire you. You might lag the market when it is booming like in the late 90's. But in the context of it's not always about what you make, it's about what you keep, I think that AMF has a better chance than most of not disappointing.I don’t know about a better chance, I would say that within the category (GI, G, I, etc…) they do fine. No better or no worse than the rest of the group with similar historic performance. A 4 star fund (historically) is a 4 star fund (or 5,3,2,or 1) as long as the beta, alpha and standard deviations are similar over longer periods of time, then the family is somewhat irrelavent.
Stating that, words like bulletproof, that need definitions to be completely understood tend to imply a confidence or performance that may not be sustainable.oops on the spelling, I was trying to do 2 things at once…
It seems to me, that every fund/fund family has to have its limits before mediocrity is not only possible, but inevitable.
Question; What are American Funds 5 biggest holdings, and once they make a decision to exit, how the hell do they do that in a reasonable period of time? Question #2 - Any idea of how much overlap there is among the AF Equity lineup, i.e. Wash Mut, Fund Value, Inv co of America, etc? Just food for thought. Admittedly they have done an amazing job as they grow bigger and bigger.Too Big. These are not the same funds that my Grandfather bought going on 60 years ago. They are hitting legal capacity for many of the stocks they hold. Meaning, their 175th best idea is forced into action because they cannot buy any more Goog. Why are they so loathe to close a fund? The answer “we just add more managers” does not create more stocks in the universe they are choosing. Instead of AWSHX, use Eaton Vance Large Cap Value. Instead of AGTHX, use Janus advisor 40. Instead of Small Cap World, use RCM Global Small Cap. Instead of any of their bond funds, go with Gross or Fuss. Or, if cost is the major concern, just use an ETF. In case you have not noticed, American Funds are just closet index funds.
ICA is 75% domestic, 13% Intl, 12% cash. Owning those same 3 indexes the last 5 years (in same proportion) beat the returns of ICA -at NAV. Facter in loads and ICA loses even worse. The fact that they “beat the S and P” as they say at Jones and elsewhere is not apples/apples. It’s simply an easy sale.
new_indy,
If you read 2 posts beyond my initial post I defined bulletproof. Obviously the value of ALL things will go down at some point. What I was getting at is relative to disasters at other fund families can American Funds maintain their current reputation through different market cycles. Also, who cares if CAIBX is down this year? Who cares if it remains down this year and next? That has no bearing on whether or not it is a good fund. What matters is that the fund company stays true to their philosophy so that as advisors we know what our clients own and can manage their portfolios appropriately.Hmmm… go back to economics 101 and look up the term opportunity cost
Yeah, the simple sale comes in when I tell my clients that ICA isn't flashy, doesn't make lot of noise, and will bore you to wealth. I ran a couple of hypos real quick based on your quote. I used IVV, EFA, and a 2% cash position for 5 years. The cash is the only variable I'm not sure if I'm high or low on. Those indexes in the % you used returned 11.1% on the trailing 5 years. ICA with the a load ($100K) was at 10.1% over the same timeframe. So yes, those indexes beat ICA. But ICA had a lower beta, higher alpha. Less risk for the same return. I didn't add any fees to the index portfolio either. Some place like ML would charge 1.5% annually or more (maybe less for an indy) to manage the money. So, throw that in and your facts are a little dicey. As long as the investments you are using are meeting the clients goals, does it really matter whether or not ICA beats the index?ICA is 75% domestic, 13% Intl, 12% cash. Owning those same 3 indexes the last 5 years (in same proportion) beat the returns of ICA -at NAV. Facter in loads and ICA loses even worse. The fact that they “beat the S and P” as they say at Jones and elsewhere is not apples/apples. It’s simply an easy sale.
I find it fascinating that some forum members focus so heavily on short-term results when discussing long-term investments. Does it really matter which funds are up this year and which are down?
new_indy, by encouraging us to look up the definition of "opportunity cost," are you implying that you in fact possess the crystal ball we all so desperately long for? Are you saying that you know which funds to move in and out of and when to move in and out of them? If you're trading stocks on a daily basis, then short-term performance is paramount, but I find it to be of little consequence in a 5, 10, 20-year plus investment.I don't think anyone said they were bad funds, just that they aren't bulletproof, but if they don't beat the indices then what is the point of investing in them? There are plenty of no-loads, ETF's, etc that have equal or better performance. In fact, if you are a true "buy and holder" just buy a quality diversified multi-national corp and history says you will likely beat the indices and most mutual funds by rienvesting the dividend over a 10 year period. Of course your revenue sharing and trails would vanish, but your clients would be "bored to wealth" and know exactly what they own.
Crystal ball…Nope. Just lot of historical charts that show the dangers of complacency, and an understanding that if you bought a loaded mutual fund at the beginning of this year and it is down 10%, then you are down 15% and you will get the pleasure of paying a capital gains tax at the end of the year on the distributions. How does a fund with a historic average of around 10% recoup that in a reasonable period of time?
Borker Boy,
You are right on the money. Making knee jerk decisions after a few months when investing in mutual funds is because of their short term performance is absolutely ridiculous.Don’t misrepresent my comments. I don’t make Knee-jerk reaction with mutual funds. In fact, I hardly ever put my clients in mutual funds unless there are monthly distribution issues, or other case by case reasons. If I have a client or prospect that insists on using funds, then I generally refer them along to the no-load market. They just don’t need an advisor to invest in funds and I don’t need the headaches. I was simply responding to the dangerous belief that any investment is “bulletproof”.
An up year of 30% should do it in about a year. Thats the funny thing about averages.How does a fund with a historic average of around 10% recoup that in a reasonable period of time?
So you put them in ETFs instead? Hate to tell you this but they don't need you for that either. If not ETFs, what are you using?Don’t misrepresent my comments. I don’t make Knee-jerk reaction with mutual funds. In fact, I hardly ever put my clients in mutual funds unless there are monthly distribution issues, or other case by case reasons. If I have a client or prospect that insists on using funds, then I generally refer them along to the no-load market. They just don’t need an advisor to invest in funds and I don’t need the headaches. I was simply responding to the dangerous belief that any investment is “bulletproof”.
We’ve had this discussion before spiff. I use etf’s sparingly as well and only in areas and markets I don’t feel comfortable understanding myself. I use many different products depending on my clients goals. I stay away from insurance products for the most part unless it is term life. Most of the things I use don’t mix well with Kool-aide, but as I said before in this thread, buying and holding your multi-nationals (not suggestions just ideas for you to research) such as PG, PEP, DHR, BRKa, UTX, XOM or many others you will most likely outperform mutual funds over the long haul. Plus you don’t have capital gains unless you sell. Stating that, you can’t totally ignore them because, as this thread started, nothing is bulletproof.
Sorry, I have a lot of converstations.
I don't disagree with you that holding those companies would have done whatever you wanted. Most people don't have that kind of discipline. When their stock hits the newspapers they get nervous. When their stock drops $5, or $5000 for Mr. Buffett, they start thinking about selling. Kudos to you for having the gumption to build your own stock portfolios. However, I personally prefer to have a guy with CFA or CFP or some other alphabet soup version behind his name do the due diligence for me. I have an uncle who has millions. His upstairs office overlooks a golf course that overlooks the Monterey Bay. He has a guy that does his investing that believes like you do. He asked me one time what was wrong with taking his millions and buying 20 shares of BRK A. I didn't have a really good answer for him. The power of the kool aid was strong that day.An up year of 30% should do it in about a year. Thats the funny thing about averages.[/quote][quote=new_indy] How does a fund with a historic average of around 10% recoup that in a reasonable period of time?
new_indy do you think one year is a reasonable period of time?
[quote=newnew]ICA is 75% domestic, 13% Intl, 12% cash. Owning those same 3 indexes the last 5 years (in same proportion) beat the returns of ICA -at NAV. Facter in loads and ICA loses even worse. The fact that they “beat the S and P” as they say at Jones and elsewhere is not apples/apples. It’s simply an easy sale.[/quote]
Was ICA balance exactly the same over the last 5 years? I don’t know but what I do know is the adjustments in the balance is why you hire the mutual fund managers. newnew are you adjusting your allocation for you clients base on what you know is happening to the markets in India, high yield bonds, the industrial sector and gold?
That is why CAIBX is so succesful. Its components are basically ICA, Bond Fund, and CWGI. The return is about the same is the comparable weightings of each (i.e. 20% Bond Fund, etc.). But CAIBX did it with far less risk (volatility) than the combo of those three. That’s because the managers are tactically re-weighting each componant.
Indexes may have the same returns, but managed funds can often do it with less volatility.
no and no.
Max…no I don’t think 1 year is a reasonable period of time. Do you really think ica will turn in a 30% return next year? How about a 15% 2 years in a row? It could happen I suppose, but what I do has been pretty successful so far, I see no need to start following the crowd.
Remember your ownership/loanership training? What do you really own when you buy a mfd? At the end of the day all you own is smoke and the belief the the manager knows what they are doing. Going off on a tangent, but following that line of reasoning: If you read a prospectus and look at the percentage of money the Manager actually has in his own fund compared to his net worth you generally won't find a huge percentage (assuming you find the information at all). Why would that be? He is there to manage the money on a day to day basis isn't he/she? Why don't they have 100% of there assets in their own fund family? Yet what percentage of your client's assets are locked up into one fund family?[quote=new_indy]Max…no I don’t think 1 year is a reasonable period of time.
[/quote]I will have to disagree with you on this, I think 1 year is a reasonable time to recover from a 10%-15% down year. Of course you could bounce back 30% in 6 months and stay flat for the other six months. I'm not going to take the time to research that though.
[quote=new_indy] Do you really think ica will turn in a 30% return next year? How about a 15% 2 years in a row? [/quote]
Pulling out the handy dandy ICA guide I see that in the last 73 years ICA has been down 10% or more 7 years and it has been up over 30% 9 years, with another 3 years up over 29%. ICA has done over 15% two years in a row 22 time in the last 73 years. So yea I think ICA could do 30% or over next year, even more likely to do over 15% per year for two years.
QUOTE=new_indy] If you read a prospectus and look at the percentage of money the Manager actually has in his own fund compared to his net worth you generally won't find a huge percentage (assuming you find the information at all). Why would that be? He is there to manage the money on a day to day basis isn't he/she? Why don't they have 100% of there assets in their own fund family?
[/quote]
I don't know how you would find out what the net worth of a fund manager and I would tend to believe that most mutual fund managers have a good portion of their investments with their company, but it's no something I would spend a lot of time to investigate. Primarily because I do think it would be difficult to find. I concede this point to you.
QUOTE=new_indy] Yet what percentage of your client's assets are locked up into one fund family? [/quote]
I only invested in no load mutual funds for about 20 years before joining Jones, so the one family A shares model is uncomfortable for me. So, as long as I can hit a breakpoint I almost always use at least 2 fund families. So only my smallest clients have only one fund family.
I would guess that the guys at AMF or Hartford or Fidelity have ALL of their money with their own companies. I’d guess it’s a company policy. After all, how would it look if Jim Lovelace had $1 mil in CAIBX and $5 mil in VFINX? Now, he might have money in CWGIX or NEWFX or ABNDX too, but probably not outside of AMF.
Actually you can read the numbers in the prospectus addendum under additional information. It won’t give you complete information, but it will give you an idea. Frankly I think it should be fully disclosed, just like any CEO of a corporation. After all, they are what investors put money behind, not the stocks in the funds.
I don't think it very relavent. I did notice that the only point you addressed was the one I conceded to you. Which doesn't make for a very interesting conversation.
Ok, I didn’t want to rain on your parade, but the fund in question hasn’t done 30% in over a decade. Back to back returns over 30% in '98 and '99 but not much else. The best 3 year return over 30% was back in 1943-1945. The closest it has gotten in recent history was in 2003 and it underperfomed it’s category average by 2%.
I said a 30% gain in 1 year is possible, I don't doubt that unusual and spectacular things happen upon occasion. It is just not statistically likely. Is that better fodder for the conversation? By the way, it is incredibly relavent. It has been proven by a Wharton study that funds with higher manager ownership perform significantly better than funds with lower ownership.Maxstud:
I addressed your other points to "make it a more interesting conversation" and you never responded. Is it possible I have changed your mind?
Sorry New, I was busy the weekend we had this conversation and forgot about. In a nutshell I see that ICA has returned over 30% more often then it has lost 10% in a calender year so I’m not going to alter my strategy just because an A share investor might invest right before a downturn. I believe if your unlucky enough for that to happen then a recovering in a year or so is reasonable.
I have never even considered the amount of money a manager may have in his own fund as a consideration to invest in a fund or not, although I'm sure the Wharton study is most likely valid. A very succesful fund manager may have already won the race and now only buys T-Bills and munis, like many ultra wealthy people do, in that case a stock fund may not have much interest for him. I did have one other point but cannot remember what the heck it was.Tying on to what maxstud said. It is reasonable to believe that PM’s of bond or money market funds may want to have more money in stocks and not in what they are managing.
OK working with that theory for the sake of arguement, if you limited your selections to balance funds only, with reasonable exposure to the bond market, why should any PM not have his full wealth invested in his own fund. After all, isn’t he there watching it and supposedly doing as well for his customers has he theoretically doing for himself. Please realize that this is a hypothetical arguement. I do however, truly believe PM’s should be required to show what percentage of their wealth really is in the funds they manage. I would more heavily trust a PM with a lot of his own skin in the game then the guy who just invest the minimum.
Max: I'm not saying change your strategy, I'm saying expand your time horizon. 1 year is not long enough to recoup 30% on an average (and it really is average) G&I mfd.Since nobody seemed to answer Pratos’s question about overlap I will. Run the morningstar overlap on American and it is very ugly. So many of the top holdings are held by multiple funds I don’t use them at all for asset allocation. A company 401 (k) plan is the only possibility. Yes long term results of the funds are respectable but when you look at the overlap I don’t think you are getting true diversification. No doubt the Jones brokers will disagress since I know you sell a ton of them but that is my little opinion on this matter.
Which is exactly why I dont use them anymore. Thank you.Since nobody seemed to answer Pratos’s question about overlap I will. Run the morningstar overlap on American and it is very ugly. So many of the top holdings are held by multiple funds I don’t use them at all for asset allocation. A company 401 (k) plan is the only possibility. Yes long term results of the funds are respectable but when you look at the overlap I don’t think you are getting true diversification. No doubt the Jones brokers will disagress since I know you sell a ton of them but that is my little opinion on this matter.
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