Methodology | American Funds

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Methodology

We calculated the Select Equity, Average Equity and American Funds groups by building equal-weighted portfolios using the average monthly returns of the constituents and then calculating a growth of $100,000 for the groups and the index for each rolling period indicated (one-, three-, five- and 10-year) over the period from January 1997 to December 2016.

We calculated the percentage of time the Select Equity group and the Average Equity group beat the index by building an equal-weighted portfolio using the average monthly returns of the constituents and then calculating a relative return against the index for each rolling period indicated (one-, three-, five- and 10-year) over the period from January 1997 to December 2016. For example, to derive rolling one-year results for the Select Equity group, we started with the product of the 12 monthly returns for January 1997 to December 1997 and subtracted the product of the monthly index returns over the same period. Next, we ran the same calculations using the 12 monthly returns for February 1997 to January 1998. We did this for every rolling 12-month period through December 31, 2016, and then calculated the percentage of 12-month periods that the Select Equity group beat the index. We used the same process for the Average Equity group of funds.

The 18 American Funds equity-focused funds used in our analysis and the relevant indexes/index blends with which they were compared are as follows: AMCAP Fund®, The Growth Fund of America®, The New Economy Fund®, American Mutual Fund®, Fundamental Investors®, The Investment Company of America® and Washington Mutual Investors Fund℠ (Standard & Poor’s 500 Index); EuroPacific Growth Fund® and International Growth and Income Fund℠ (MSCI All Country World ex USA Index); New Perspective Fund®, New World Fund®, and Capital World Growth and Income Fund® (MSCI All Country World Index); SMALLCAP World Fund® (MSCI All Country World Small Cap Index); Capital Income Builder® and American Funds Global Balanced Fund℠ (60% MSCI All Country World and 40% American Funds Developing World Growth and Income FundSM (MSCI Emerging Markets Index), Bloomberg Barclays Global Aggregate indexes); and The Income Fund of America® and American Balanced Fund® (60% Standard & Poor’s 500 and 40% Bloomberg Barclays U.S. Aggregate indexes). All relevant indexes listed are funds’ primary benchmarks, with the exception of Capital Income Builder and The Income Fund of America. The primary benchmark for Capital Income Builder is Standard & Poor’s 500 Index; for The Income Fund of America, they are Standard & Poor’s 500 and Bloomberg Barclays U.S. Aggregate indexes. In order to provide a more relevant comparison, Capital Income Builder and The Income Fund of America were compared to their Morningstar® benchmark index blend, as described below.

Some of the aforementioned indexes do not have sufficient history to have covered the lifetime of certain funds; therefore, comparable indexes were used for those periods. These funds, indexes and periods are as follows. For American Balanced Fund, 60% Standard & Poor’s 500 and 40% Bloomberg Barclays U.S. Government/Credit indexes were used for the period July 31, 1975 (month-end following the fund’s inception on July 26, 1975), through December 31, 1975. Results for this index blend and the index blend (60% Standard & Poor’s 500 and 40% Bloomberg Barclays U.S. Aggregate indexes) that was subsequently used were rebalanced monthly. For Capital World Growth and Income Fund, results for the MSCI All Country World Index reflect dividends gross of withholding taxes for the period March 31, 1993 (month-end following the fund’s inception on March 26, 1993), through December 31, 2000, and net of withholding taxes thereafter. For New World Fund, results for the MSCI All Country World Index reflect dividends gross of withholding taxes for the period June 30, 1999 (month-end following the fund’s inception on June 17, 1999), through December 31, 2000, and net of withholding taxes thereafter. For EuroPacific Growth Fund, the MSCI EAFE (Europe, Australasia, Far East) Index was used for the period April 30, 1984 (month-end following the fund’s inception on April 16, 1984), through December 31, 1987; results for the index reflect dividends net of withholding taxes. Results for the MSCI All Country World ex USA Index, which was subsequently used, reflect dividends gross of withholding taxes from January 1, 1988, through December 31, 2000, and dividends net of withholding taxes thereafter. For New Perspective Fund, the MSCI World Index was used for the period March 31, 1973 (month-end following the fund’s inception on March 13, 1973), through December 31, 1987; results for the index reflect dividends net of withholding taxes. Results for the MSCI All Country World Index, which was subsequently used, reflect dividends gross of withholding taxes from January 1, 1988, through December 31, 2000, and dividends net of withholding taxes thereafter. For SMALLCAP World Fund, the S&P Global <$1.2 Billion Index was used for the period April 30, 1990 (fund’s inception date), through May 31, 1994. Results for the MSCI All Country World Small Cap Index, which was subsequently used, reflect dividends net of withholding taxes. For Capital Income Builder, 60% MSCI World and 40% Citigroup World Government Bond indexes were used for the period July 31, 1987 (month-end following the fund’s inception on July 30, 1987), through December 31, 1987; results for the MSCI World Index reflect dividends net of withholding taxes. From January 1, 1988, through December 31, 1989, 60% MSCI All Country World and 40% Citigroup World Government Bond indexes were used; results for the MSCI All Country World Index reflect dividends gross of withholding taxes. From January 1, 1990, and thereafter, 60% MSCI All Country World and 40% Bloomberg Barclays Global Aggregate indexes were used; results for the MSCI All Country World Index reflect dividends gross of withholding taxes from January 1, 1988, through December 31, 2000, and net of withholding taxes thereafter. Results for this index blend and the index blend used prior to it were rebalanced monthly. For The Income Fund of America, 60% Standard & Poor’s 500 and 40% Bloomberg Barclays U.S. Government/Credit indexes were used for the period November 30, 1973 (fund’s inception date), through December 31, 1975. Results for this index blend and the index blend (60% Standard & Poor’s 500 and 40% Bloomberg Barclays U.S. Aggregate indexes) that was subsequently used were rebalanced monthly.

Capital Income Builder and American Funds Global Balanced Fund fall in the Morningstar World Allocation Category, and The Income Fund of America and American Balanced Fund in the Morningstar Moderate Allocation Category. All other groupings were pulled by the following benchmarks: Standard & Poor’s 500 Index, MSCI All Country World Index (gross and net), MSCI All Country World ex USA Index (gross and net) and MSCI All Country World Small Cap Index (gross and net). The groupings were filtered for oldest share class and excluded fund of funds, index funds, feeder funds, lifecycle funds, in-house fund of funds and enhanced index funds.

Due to the dynamic nature of the Morningstar database, results for the index groupings may change.

All periods were calculated using geometric linking of net-of-fee monthly returns from Morningstar. The American Funds and index returns were calculated internally in the same manner using monthly returns.

Bloomberg Barclays Global Aggregate Index represents the global investment-grade fixed income markets. Bloomberg Barclays U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market. Bloomberg Barclays U.S. Government/Credit Index is a market-value weighted index that tracks the total return results of fixed-rate, publicly placed, dollar-denominated obligations issued by the U.S. Treasury, U.S. government agencies, quasi-federal corporations, corporate or foreign debt guaranteed by the U.S. government, and U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity and quality requirements, with maturities of more than one year. Citigroup World Government Bond Index represents a comprehensive measure of the total return results of the government bond markets of more than 20 countries meeting certain market capitalization requirements. MSCI All Country World Index is a free float-adjusted market capitalization-weighted index that is designed to measure results of more than 40 developed and emerging equity markets. Results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter. MSCI All Country World ex USA Index is a free float-adjusted market capitalization weighted index that is designed to measure results of more than 40 developed and emerging equity markets, excluding the United States. Results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter. MSCI All Country World Small Cap Index is a free float-adjusted market capitalization-weighted index that is designed to measure results of smaller capitalization companies in both developed and emerging equity markets. Results reflect dividends net of withholding taxes. MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization-weighted index that is designed to measure developed equity market results, excluding the United States and Canada. Results reflect dividends net of withholding taxes. MSCI World Index is a free float-adjusted market capitalization-weighted index that is designed to measure results of more than 20 developed equity markets. Results reflect dividends net of withholding taxes. Standard & Poor’s 500 Index is a market capitalization-weighted index based on the average weighted results of 500 widely held common stocks. S&P Global <$1.2 Billion Index includes only stocks in developed countries.

For fee-related illustrations based on data from Morningstar, linear interpolation was used to fill in missing expense ratios for some funds. Linear interpolation, a method of constructing a curve or function that approximates a set of data, is often used to fill the gaps in a table of data. For example, if a table includes the population of a country for 1970, 1980, 1990 and 2000, linear interpolation can be used to estimate the population for 1995.


Specific Methodology for Hypothetical 20-Year Investments Illustrations

The equity-focused American Funds represent a combination of the 18 equity-focused American Funds. The illustration assumed hypothetical investments equally weighted into the funds for each month as they came into existence. The investments were rebalanced monthly.

The index blend represents relevant index blends, weighted according to the primary benchmarks of the American Funds with which they were compared. The investments were rebalanced monthly. MSCI ACWI, MSCI ACWI ex USA and MSCI ACWI Small Cap results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter. MSCI World and MSCI EAFE results reflect dividends net of withholding taxes. For the specific indexes/index blends and weightings, which reflect the benchmark distribution of the American Funds in the illustration, refer to the table below (percentages may not add up to 100% due to rounding).

The ending dollar amounts of the hypothetical investments are based on monthly returns calculated internally.

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Compiling the Fund Universe

The universe of both large-cap domestic and large-cap foreign funds drew from Morningstar’s Open-End U.S. and Foreign Large Value, Large Blend and Large Growth categories. The universe of Moderate Allocation and World Allocation funds drew from Morningstar categories of the same name. Both live and dead funds were included in each universe in order to eliminate survivorship bias. For live funds, only the oldest share class was used. For dead funds with multiple share classes, the median monthly returns were used. Results are at net asset value. If a sales charge had been deducted results would have been lower. For fee-related illustrations that include dead funds with multiple share classes, the median expense ratios were used. Due to the dynamic nature of the Morningstar database, results for the Morningstar universe may change.


Screening Process

Relying on Morningstar Direct data analysis software, we performed screens for one or more of the following criteria: downside capture ratio, expense ratio and manager ownership at the firm level.

To screen for downside capture ratio, we analyzed statistics for all rolling three-year periods in the years under study. Three-year periods were chosen because many funds that “died” did so in the first five years of their lives; therefore, using rolling periods of greater than three years would have excluded many dead funds from our study. For each rolling three-year period, we ranked all funds into quartiles by downside capture, then classified each fund based on which quartile it most frequently belonged to for all those periods.

To screen for expense ratio, we calculated quartiles based on averages of annual report Net Expense Ratios (NER) for all observed Morningstar categories for the 20-year period indicated. For funds with missing expense ratios, we filled in gaps between two available data points using linear interpolation, a statistical method used to estimate the values between two known data points in a time series.

To screen for manager ownership, we calculated quartiles using weighted averages of the midpoints of Morningstar ranges of manager holdings at the firm level. Each fund was assigned the weighted average of its firm manager holding. Funds without values were excluded from the quartile rankings.

Which screens we used and how we implemented them depended on which investment phase we were examining and how many funds qualified overall.

We used a two-step screening process, beginning with the downside capture ratio. Across each fund category, we sought the top two quartile grouping of funds with low downside capture ratio. Using this subset, we then screened for low NER and high manager ownership — the intersection of those two groups — seeking the top quartile for large-cap domestic funds and the top two quartiles (50%) for large-cap foreign, Moderate Allocation and World Allocation funds. (The number of quartiles used depended on the number of qualifying funds. Using the top quartile alone for some Morningstar categories would have yielded an insufficient number of funds for our study to be meaningful.) We created an equally weighted portfolio of qualifying funds.

The screening for large-cap domestic resulted in six qualifying American Funds: AMCAP Fund, American Mutual Fund, Fundamental Investors, The Growth Fund of America, The Investment Company of America and Washington Mutual Investors Fund. The screening for large-cap foreign resulted in two qualifying American Funds: EuroPacific Growth Fund and International Growth and Income Fund.

The screening for the Moderate Allocation and World Allocation categories resulted in two qualifying American Funds apiece: The Income Fund of America and American Balanced Fund, and Capital Income Builder and American Funds Global Balanced Fund, respectively.


For the Distribution Phase Article, a Powerful Combination for Retirees

Here we used a two-step screening process, beginning with the downside capture ratio. Across each fund category, we sought the top two quartile grouping of funds with low downside capture ratio. Using this subset, we then screened for low NER and high manager ownership — the intersection of those two groups — seeking the top quartile for large-cap domestic funds and the top two quartiles (50%) for large-cap foreign, Moderate Allocation and World Allocation funds. (Again, the number of quartiles used depended on the number of qualifying funds.) We created an equally weighted portfolio of qualifying funds.

The screening for large-cap domestic resulted in six qualifying American Funds: AMCAP Fund, American Mutual Fund, Fundamental Investors, The Growth Fund of America, The Investment Company of America and Washington Mutual Investors Fund. The screening for large-cap foreign resulted in two qualifying American Funds: EuroPacific Growth Fund and International Growth and Income Fund.

The screening for the Moderate Allocation and World Allocation categories resulted in two qualifying American Funds apiece: The Income Fund of America and American Balanced Fund, and Capital Income Builder and American Funds Global Balanced Fund, respectively.


Detailed Information About Manager Ownership and NER Screens

The Securities and Exchange Commission requires that mutual funds disclose all fees and expenses in a standardized table published in the front portion of the fund prospectus. The SEC also requires that a fund disclose in its statements of additional information (SAI) certain information about its portfolio managers, including ownership of securities in the fund. Ownership disclosure is made using the following seven ranges: none; $1 to $10,000; $10,001 to $50,000; $50,001 to $100,000; $100,001 to $500,000; $500,001 to $1,000,000; and over $1,000,000.
 


Glossary

Success rate is the percentage of time a fund (or a group of funds) has outpaced its relevant index (or peer group) over rolling periods.

Alpha is a measure of the difference between a portfolio’s actual returns and its expected results, given its level of risk as measured by beta. A positive alpha figure indicates the portfolio has generated results better than its beta would predict. In contrast, a negative alpha indicates the portfolio has lagged, given the expectations established by beta.

Beta is a relative measure of a fund’s sensitivity to market movements over a specified period of time. The beta of the market (represented by the benchmark index) is equal to 1; a beta higher than 1 implies that a fund’s return was more volatile than the market. A beta lower than 1 suggests that the fund was less volatile than the market.

Downside capture ratio reflects the ratio of annualized fund-versus-index returns for all months in which the index had a negative return.

Sharpe ratio uses standard deviation and excess return (relative to a risk-free rate) to determine reward per unit of risk. The higher the number, the better the portfolio’s historical risk-adjusted performance.

Standard deviation (annualized, based on monthly returns) is a common measure of absolute volatility that tells how returns over time have varied from the mean. A lower number signifies lower volatility.


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

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. 

Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by Capital Group, which receives fees for managing, distributing and/or servicing its investments.

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.