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Money Magazine's "the Mole" answers questions about American Funds (and other load funds by extension), Link

"And those loads can really cut into the returns, even for a top performing fund family like American Funds. Vanguard, for example, beat its category average by 1.20% annually over the same five year period. While a bit less than the 1.48% advantage for American Funds, you would save the 5.5% upfront load. Thus, even if American continues to outperform Vanguard, it is likely you would still be better off avoiding the loads."

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Uh oh! Get ready for mike07. I recently just switched from American Funds to Vanguard and it's great for more reason than just the load:

1. Expenses with Vanguard are 1/3-1/4 of American Funds
2. No load and better fund choices
3. Funds aren't all huge monsters of over 100 billion that own 5% of every major company
4. Indexed funds are 10x more tax efficient if held in a taxable account (main reason I switched).

if you are fortunate to have American Funds available through a large retirement plan
then load isn't an issue --- under these circumstances --- American Funds are great

richfish13 said: Uh oh! Get ready for mike07. I recently just switched from American Funds to Vanguard and it's great for more reason than just the load:

1. Expenses with Vanguard are 1/3-1/4 of American Funds
2. No load and better fund choices
3. Funds aren't all huge monsters of over 100 billion that own 5% of every major company
4. Indexed funds are 10x more tax efficient if held in a taxable account (main reason I switched).


+1

I recently did the same thing, except switched to Vanguard from USAA. Also opened a PMA account with Wells Fargo so I could get 100 free trades yearly and just buy Vanguard index funds.

I agree in general loaded funds are junk. I think anyone with a short term horizon should not be in loaded funds either because it will take in general 4-6 years to recoup the load.

But what the article did was compare returns durning bull markets only then ends the article with "I think it's a close call, but I'd recommend broad low cost index funds or ETFs from Vanguard, Fidelity, and iShares over the American Funds."

Compare American Funds from 1998 till today against any index you want and American Funds killed the index. Compare American Funds from last 52 week performance and it kills any index fund. Yeah he is right if you compare from 2002 till 2007 both funds preformed comparable. It just that durning bear markets American Funds do not go down as much as index funds or other funds for that matter because they are actively managed.

Is that a good enough reason to buy American Funds over index funds? Well if you plan to keep your position for 20 years and do not know when you plan to sell American Funds would be a safer bet just because if you need that money in the middle of bear market chances are the American Fund held up better making your overall return from purchase time to sale time better. Also remember if you invested $10k in American Funds, Vanguard or Fidelity even after paying the load and higher expense ratio on American Funds between 1998 till 2008 American Funds outperformed them both by slight over 10%.

Now I know the argument many of you are going to make. Past performance is no guarantee etc. I agree but there is no guarantee with any investment either. The index's could be in a bear market for next 10 years while American Funds go up 10% a year for the next 10 years or it could be other way around.

I think there are very few loaded funds worth paying for and while 1 fund family might have 1 good fund 10 other funds they have are total junk and not worth paying for.

germanpope said: if you are fortunate to have American Funds available through a large retirement plan
then load isn't an issue --- under these circumstances --- American Funds are great


Also tax efficiency is not an issue in tax-deferred accounts.

kamalktk said: Money Magazine's "the Mole" answers questions about American Funds (and other load funds by extension), Link

"And those loads can really cut into the returns, even for a top performing fund family like American Funds. Vanguard, for example, beat its category average by 1.20% annually over the same five year period. While a bit less than the 1.48% advantage for American Funds, you would save the 5.5% upfront load. Thus, even if American continues to outperform Vanguard, it is likely you would still be better off avoiding the loads."


Well let us look at this for what it is and then let us look at a true analysis.

There are a few problems with what this guy (the Mole) has to say.

1) He did not even take into account risk. You could find a portfolio of emerging markets index funds from the past 10 years that destroyed most AF and/or Vanguard index funds, but you would have had to take on substantially more risk.

This is not even the most flawed part of what this guy said, but my next point is.

2) He lumped every single fund AF had together and then lumped every single index fund Vanguard has and lumped them together. His numbers would include large, mid, small, muni-bond funds, money market funds, bond funds, government securities funds, etc. What his numbers mean is that if you invested in every single American Fund mutual fund evenly distributed, then he is right that you would have only outperformed peer funds by 1.48%. I don't know anyone who invests in 30+ AF with exactly the same even distribution. You don't take every Chevy auto's 0-60 times and every Honda's 0-60 times and avg. them out and come up with the conclusion that Honda's are faster than Chevy's (Corvette) because the data lumped together shows this.

I would hope that most who invest in mutual funds are investing in Large (Growth, Blend, Value), Mid, and Small types of funds.

If we throw out the bond funds, money market funds, government securities funds, etc. what does the picture look like?

Over the past 10 years there are 11 Large Blend, Growth, and Value AF and 11 Large Blend, Growth, and Value Vanguard funds to look at. All numbers quoted are after max fees and loads.

What do the numbers look like:
AF Return % - 8.51% avg. for all 11 funds
Peer Return % - 5.67% avg for peer funds of those 11 AF funds
Difference % - 2.84%

So AF outperformed its peer funds by an avg, of 2.84% when looking at all 11 large type funds.

Vanguard Return % - 6.20% for all 11 Vanguard Index Funds
Peer Return % - 6.91% avg. for peer funds of those 11 Vanguard funds
Difference % - (-.705%)

So Vanguard UNDERPERFORMED its peer funds by .705% when looking at all 11 large type funds.

That would bring the break even point on the load to about 2 years.

Many would say "Well what about risk?" since you seemed to bring that up above.

Std. Deviation avg. of all 11 AF - 13.08
Std. Deviation avg. of all 11 Van - 16.07

Oops. AF were less risky to achieve this performance as well.

We can do the same for Mid and Small as well, but I think most of you get the picture. Please feel free to look at any 10 year rolling period and for the vast majority (over 90%) you will see the same picture. I would also be glad to PM anyone this list of the 22 funds I used, so they can see I did not cherry pick.

richfish13 said:
1. Expenses with Vanguard are 1/3-1/4 of American Funds
2. No load and better fund choices
3. Funds aren't all huge monsters of over 100 billion that own 5% of every major company
4. Indexed funds are 10x more tax efficient if held in a taxable account (main reason I switched).


Re 1. Who cares if your return is more (after expenses) and your risk is less for similar type funds.
Re 2. What better fund choices do they have?
Re 3. Who cares if your return is more (after expenses) and your risk is less for similar type funds.
Re 4. See what Bobalude said.

Now everyone can vote red to show you have no data or facts to back up an opinion, so the only thing you can do is vote red.

kamalktk said: Money Magazine's "the Mole" answers questions about American Funds (and other load funds by extension), Link

richfish13 said:
1. Expenses with Vanguard are 1/3-1/4 of American Funds
2. No load and better fund choices
3. Funds aren't all huge monsters of over 100 billion that own 5% of every major company
4. Indexed funds are 10x more tax efficient if held in a taxable account (main reason I switched).


Re 1. Who cares if your return is more (after expenses) and your risk is less for similar type funds.
Re 2. What better fund choices do they have?
Re 3. Who cares if your return is more (after expenses) and your risk is less for similar type funds.
Re 4. See what Bobalude said.


Rere 1: You can never totally control return but you can totally control expenses and to some degree taxes. Because of that, it's most advantageous to keep taxes and expenses as low as possible.
Rere 2: Vanguard has tons of choices compared to American Funds. Just one example is small cap, where AF has an expense ratio of over 1% and mediocre returns.
Rere 3: Confused
Rere 4: I contribute the max to my IRA every year and don't have a 401k and will most likely always have a taxable account, and index funds help to limit taxes when everything can't be in a tax deferred account. I'm guessing most people here have atleast something in a taxable account.

mikef07 Very good analysis even better than mine. I just compared 1 fund American Funds Large Cap Growth fund to Fidelity large cap fund (old Peter Lynch fund) and Vanguard Large Cap Growth Funds and S&P 500 Index Funds over a 10 year period which included 1 bear market + current bear market.

AF is down less than 6% from June of last year till now vs Fidelity and Vanguard funds are down about 10%. The same thing happened back between 1999 and 2003 AF lost much less ie from peak to bottom was down 8% vs Fidelity and Vanguard funds depending on the fund lost as much as 50%(ie Index fund) or as little as 21% for old Peter Lynch Fund.

Only time Fidelity and Vanguard funds preformed about the same or slightly better were in 1998, 2003 till 2006 and even then AF performance was +/- less 1% after all expenses. Over the full 10 year period AF after all expenses even the load still outperformed both Fidelity and Vanguard funds by about 10%(depending on the fund it was slightly more or less).

So some loaded funds do add value in the form of capital preservation in bear markets. And you can not predict what the market will be like when you retire as it could be in the middle of a bear market.

richfish13 said: mikef07 said: kamalktk said: Money Magazine's "the Mole" answers questions about American Funds (and other load funds by extension), Link

richfish13 said:
1. Expenses with Vanguard are 1/3-1/4 of American Funds
2. No load and better fund choices
3. Funds aren't all huge monsters of over 100 billion that own 5% of every major company
4. Indexed funds are 10x more tax efficient if held in a taxable account (main reason I switched).


Re 1. Who cares if your return is more (after expenses) and your risk is less for similar type funds.
Re 2. What better fund choices do they have?
Re 3. Who cares if your return is more (after expenses) and your risk is less for similar type funds.
Re 4. See what Bobalude said.


Rere 1: You can never totally control return but you can totally control expenses and to some degree taxes. Because of that, it's most advantageous to keep taxes and expenses as low as possible.
Rere 2: Vanguard has tons of choices compared to American Funds. Just one example is small cap, where AF has an expense ratio of over 1% and mediocre returns.
Rere 3: Confused
Rere 4: I contribute the max to my IRA every year and don't have a 401k and will most likely always have a taxable account, and index funds help to limit taxes when everything can't be in a tax deferred account. I'm guessing most people here and atleast something in a taxable account.


I am in a taxable account and I can tell you that even after taxes the return is still higher.

I understand that you can't control returns, but when you look at data and 90% of the time it shows A happening why would you them bet (in essence) on B happening? I would love to see a scenario where your lower expensed index funds from Vanguard have outperformed similar type and risk funds from AF over a 10 year period.

I will agree that AF has a paltry selection of mid and small cap funds, but Vanguards small fund has a 10 year return of 6.18% while AF has one that had 8.41% after all fees and expenses and the 5 year numbers looked better also.

I appreciate the discussion.

Edit: I am really not getting it. I am going to assume you owned a small cap from AF that has returned 23%+ annually over the past 5 years. So you took your money out and instead decided to invest in one of the funds that returned at most 16.24% that has more risk? This does not make sense.

dolmar said: mikef07 Very good analysis even better than mine. I just compared 1 fund American Funds Large Cap Growth fund to Fidelity large cap fund (old Peter Lynch fund) and Vanguard Large Cap Growth Funds and S&P 500 Index Funds over a 10 year period which included 1 bear market + current bear market.

AF is down less than 6% from June of last year till now vs Fidelity and Vanguard funds are down about 10%. The same thing happened back between 1999 and 2003 AF lost much less ie from peak to bottom was down 8% vs Fidelity and Vanguard funds depending on the fund lost as much as 50%(ie Index fund) or as little as 21% for old Peter Lynch Fund.

Only time Fidelity and Vanguard funds preformed about the same or slightly better were in 1998, 2003 till 2006 and even then AF performance was +/- less 1% after all expenses. Over the full 10 year period AF after all expenses even the load still outperformed both Fidelity and Vanguard funds by about 10%(depending on the fund it was slightly more or less).

So some loaded funds do add value in the form of capital preservation in bear markets. And you can not predict what the market will be like when you retire as it could be in the middle of a bear market.


BTW I have the numbers on Fidelity and TRowe as well.

In a nutshell

Fidelity (6.07% return over 10 years) peer difference was 1.80% better than peers for 10 funds and TRowe's (5.38% return) peer difference was .777% better than peers for 9 funds.

ALthough the best 5 year difference was TRowe, then Fidelity, then AF, and finally Vanguard (Negative peer difference again though). The difference between TRowe and AF peer difference was .07858% (1.609% Trowe vs. 1.5836% AF)

FWIW the stats show American currently (as of 12/31/07 by morningstar) does not have any fund with significant smallcap holdings aside from one fund that is identified by name. All the others have an insignificant amount if any (< 4% at most). And also to some degree little midcap holdings as well (< 25% or even < 10%). Most funds are dominated by large cap. Any comparisons from family to family should take some consideration for this, as how mikef07 has shown well. Also means someone might need to look elsewhere to add small/mid cap holdings to compliment this fund family.

And regarding tax efficiency: two things to me would be more important than keeping the mindset of "lowest tax liability per year, defer all gains": 1) if the fund is selecting good times to sell off holdings to increase realized gains over time (as mentioned above as well) 2) the fund chooses to minimize ST cap gains and maximize LT cap gains when selling so any tax liability is at least at the lower LT cap gains rate.

Tax inefficiency can be overcome if my overall return is as good or better by the choices of the fund managers to sell. Also distributions of cap gains can raise your overall cost basis (assuming auto-reinvested cap gains) over the tax efficient fund since you are paying taxes per year on those gains already, so the eventual sale may not have as large of a tax liability. I understand this is not as efficient by definition, but a point not to be forgotten that not all of the tax liability of inefficient funds is going towards nothing.



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