Can American Funds Sustain Its Outperformance?

Among actively managed funds, American Funds has a reputation for providing investor-friendly, low-cost products with sustained records of outperformance. But has it outperformed comparable funds from Vanguard and Dimensional Fund Advisors (DFA)? If so, should investors expect its funds to maintain their edge?

I’ll answer those questions.

American Funds is the third largest mutual fund family (following Vanguard and Fidelity) in the United States. According to Morningstar, as of May 31, 2015, American Funds had nearly $1.3 trillion in assets under management across its lineup of mutual fund offerings.

The firm is an extremely popular choice among active investors and for some very good reasons. The fees it charges are investor friendly, certainly so for an active manager. American Funds doesn’t rely on “star managers” who can pick up and leave, taking their investment approach with them. Rather, the firm relies on a team of managers. It avoids the style drift that causes investors to lose control over the risk of their portfolios. And finally, the firm has become one of the market’s largest mutual fund companies because its track record is good.

The firm’s website states: “We base our decisions on a long-term perspective, which we believe aligns our goals with the interest of our clients. Our portfolio managers average 27 years of investment experience, including 22 years at our company, reflecting a career commitment to our long-term approach.”

American Funds describes its investment philosophy as “based on doing what…is right for clients.” It claims to “reward long-term results” through investment professional compensation that’s “heavily influenced by results over four- and eight-year periods” and to “invest alongside” its clients. Collectively, the firm notes, its “associates are significant investors in the company’s investment offerings.”

Recognizing the long-term success achieved by the Capital Group (the firm that manages the American Funds family of mutual funds), Charles Ellis wrote about them in his 2004 book, Capital: The Story of Long-Term Investment Excellence.

Active versus passive

As is my practice, and given the firm’s assertions about its long-term investment approach, I’ll compare the performance of American Funds’ actively managed equity funds to similar offerings from two prominent providers of passively managed funds, DFA and Vanguard. (Full disclosure: My firm, Buckingham, recommends DFA funds in constructing client portfolios.)

To keep the list to a manageable number of funds and to make sure I look at long-term results through full economic cycles, I will analyze the 15-year period that ended June 12, 2015. Also, I’ll use the lowest cost shares available when more than one class of fund is available for the full period. Furthermore, in cases where American Funds has more than one fund in an asset class, I’ll use the average return of those funds in my comparison.