American Funds ®

Market Commentary

January 2014

Active Management Still Makes Sense for Many Investors

American Funds Portfolio Manager Jim Rothenberg discusses how, in the long term, the right active manager can work out better for many investors than market timing and index investing.



James F. Rothenberg


Kevin Clifford: Jim, Capital Group and American Funds took a step this year that, some have mentioned, has seemed out of character for us. You volunteered to be the tip of the spear to begin to articulate why active management is so important to investors over long periods of time. Can you share your thoughts with us on that?

Jim Rothenberg: Well, there is a famous saying attributed to Albert Einstein. He was once asked, “What is the most powerful force in the world,” because, you know, he dealt with all kinds of quantum mechanics and gravitational theories of relativity and the like. And his answer was “Compound interest.” And if you just accept that as being, really, an Einstein-ian comment, I think, to many of us who have been around the investment business for a long time, that’s a truly important concept. And if you combine that with “time rather than timing” — because a lot of people zig when they should zag, and zag when they should zig — in many cases, for people who don’t spend inordinate amounts of time investing their money, the best thing to do is to structure a portfolio, well-diversified. And, yes, you can tweak things on the margin, but you’re not going to get all those tactical changes correct.

And so, find good funds, find good managers, work with a good financial advisor, develop a plan. And if you can find an active advantage and you can compound at 150 basis points better than whatever an index is going to give you, the difference in 10 or 20 years is substantial and ought to be worth people’s interest. But if you’re going to zig and zag, it doesn’t matter as much. You’re going to give a lot of that away getting timing wrong. If you’re going to do tactical asset allocation and try to move around a bunch of different asset classes, it isn’t going to work as well.

But for many people, active advantage makes a lot of sense. And I understand that the pundits — and in this case, the efficient-market theorists — first will tell you it doesn’t exist. I think we can show you it does — at least it does with us, with the American Funds. And then, second of all, they’ll tell you, well, even if it does exist for existing managers, it’s too hard to find. Well, I don’t think we’re that hard to find.

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