Leave it to American Funds to make a rational argument about the need for active management.
“We have this body of work and research, called The Capital Advantage,” Brendan Mahoney, senior vice president and national sales manager with the firm’s distribution arm, explained from the floor of the 2017 NAPA 401k Summit in Las Vegas. “It frames and deconstructs the argument that active managers underperform passive managers and can’t beat their benchmarks.”
Surprisingly, Mahoney noted the latter point is true, but “largely by design.”
“We took a hard look at the fees many active managers charge, as well as whether or not they have their own money in the funds they manage,” he said. “In other words, do they eat their own cooking?”
When high cost managers that don’t invest in their own funds are screened out, the list of “truly effective actively managed funds that outperform is taken down to about 100, and luckily many of those funds are ours.”
“We are active managers and we believe in investment advice,” he succinctly noted. “We can add alpha.
This view is reflected in the firm’s target gate funds, which frequently show up in the list compiled by Russ Kinnel, Morningstar’s Fund Spy, of the industry’s “Fantastic 45” Funds.
“Our portfolio oversight committee is extremely detailed about the underlying funds,” Mahoney added. “The reason is that they also those manage underlying funds, so they know what’s in there and have incredible expertise in their respective areas. It’s something we’ve coined the ‘glide path within the glide path,’ which differentiates us.”
Indeed, American Funds’ portfolio managers average 27 years of experience, including 22 years at the company. The average portfolio manager tenure for the American Funds is 9.7 years; for the industry, it’s 6 years.
The firm is currently looking into more dividend income-type of target date funds with glide paths that offer better results with lower associated risk, Mahoney concluded. He also proudly pointed to the firms R6 retirement shares, which he said are extremely cheap “in the high-30s to low 40s basis point range.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
