How Much Can It Matter? | American Funds

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The Capital Advantage

How Much Can It Matter?

Choosing an investment manager with a solid track record can make the difference between success and shortfall.

  • The selection of an investment manager with a proven track record of consistently outpacing the broad market is crucial. The right decision can transform long-term investment outcomes, and make the difference between success and shortfall.
  • We looked at the issue through the lens of a 401(k) investor. In this example, an investor contributed $500 a month for 20 years. The same amount was invested in a blend of relevant indexes. The equity-focused American Funds produced an ending value that was $28,947 greater than the index blend, or 12% more wealth.
  • This isn’t just an academic exercise. Investors have real needs and goals. The goal is to create better investment outcomes and increase the likelihood of success.

The Capital Advantage Can Be the Difference Between Success and Shortfall Equity-Focused American Funds Provided a Significant Advantage for Investors

Data from published sources calculated internally.1

  • Equities have been a major source of appreciation; they also have been a major source of volatility. Therefore, investing in equity with a history of downside resilience can be valuable in retirement.
  • Our research shows that a group of equity funds sharing three traits — low downside capture, low expense ratio and high firm-level manager ownership — historically has, on average, generated strong results in withdrawal scenarios with greater risk-adjusted returns and a lower standard deviation than indexes.
  • Historically, investing in these Select Equity funds would have resulted in greater ending wealth in withdrawal scenarios.

American Funds Portfolios Generated Greater Ending Wealth With Lower Volatility

Return of a hypothetical $500,000 initial investment with an initial 4% withdrawal rate, increasing by 3% each year thereafter for the 20-year period ended December 31, 2016.

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Source: Capital Group, based on Morningstar data.2

  • Over the life cycle of an investor, incremental gains in large-cap equity can make a big difference in retirement outcomes, which is why manager selection is so important in the core.
  • The accompanying chart shows that, in the accumulation and distribution phases, a portfolio of Select Equity funds would have created greater wealth than a portfolio of index funds. A portfolio of American Funds would have done better.
  • Historically, using screens to find the group of funds with the highest management ownership and lowest cost would have significantly improved outcomes during the accumulation and retirement income phases relative to a passive approach.

Investors Would Have Created More Wealth With an Select Equity Core 

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Source: Capital Group, based on Morningstar data.3

  • The right mix of investments at a portfolio’s core can be crucial. Investing in a select group of funds with high ownership and low costs can significantly improve portfolio outcomes over time on a range of key metrics.
  • Based on the average of rolling five-year periods we studied, the screened core portfolio registered, relative to the index portfolio: higher returns, higher Sharpe ratio, higher upside capture, and lower downside capture.
  • Specifically, the screened portfolio’s average return was 151 basis points higher than the index portfolio’s. In short, the screened core generated greater risk-adjusted returns.

A Screened Equity Core Would Have Made a Meaningful Difference Average of Rolling Monthly Five-Year Core Portfolio Results (1997–2016)

Source: Capital Group.4

1The results for the American Funds are Class A shares. The 401(k) hypothetical $500-a-month investment represents a total of $120,000 for the 20-year period ended December 31, 2016. Data from published sources were calculated internally. For the constituents of the American Funds and index blend, as well as additional details about the data, see Methodology.

2Source: Capital Group, based on Morningstar data. Hypothetical results are based on monthly returns at net asset value of portfolios from January 1997 to December 2016. The components of each allocation can be found in the Methodology section of the Appendix. The U.S./Foreign Large-Cap index blend portfolio consists of 50% S&P 500 Index and 50% MSCI All Country World Index ex USA. The Moderate Allocation/World Allocation index blend portfolio consists of 60% MSCI All Country World Index and 40% Bloomberg Barclays Global Aggregate Index. Past results are not predictive of results in future periods. Portfolios were rebalanced monthly. The indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.

3The results for American Funds Core are Class A shares. Data from published sources calculated internally. Hypothetical results assume reinvestment of all dividends. The average annual return and ending investment values for all three investments take into account withdrawals, and portfolios were rebalanced monthly. Past results are not predictive of results in future periods. The index core represents an equally divided allocation between the S&P 500 Index and the MSCI ACWI ex USA Index. The screened equity core comprises actively managed funds in Morningstar’s large-cap categories that fall within both the least expensive net expense ratio and the highest firm-level manager ownership quartiles. The American Funds core represents a 50% allocation to seven equally weighted U.S.-focused American Funds and a 50% allocation to two equally weighted foreign-focused American Funds. The constituents of each allocation can be found on the Methodology page. These sample portfolios exclude fixed-income allocations typical of core portfolio holdings. The indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.

4Source: Capital Group. Hypothetical results are based on averages of rolling five-year periods of monthly returns from January 1997 to December 2016. The components of each allocation can be found on the Methodology page. Past results are not predictive of results in future periods. The index core represents an equally divided allocation between the S&P 500 Index and the MSCI ACWI ex USA Index. These sample portfolios exclude fixed-income allocations typical of core portfolio holdings. Portfolios were rebalanced annually. The indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

This material is intended for use by financial professionals or in conjunction with the advice of a financial professional.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.