Low Costs and Manager Ownership Attributes of Best Performing Funds

Investment News reports on a study by American Funds that “stud[ied], over multiple time periods, [] the entire Moringstar Inc. fund database” and found that screening for two key attributes helps to distinguish funds with “better average returns than the average of all active funds and their respective indexes.” These are:

  1. “Lower fund expenses,” and
  1. “Higher portfolio manager ownership of the fund.”

The study found that over “1-year rolling periods over each month of the past 20 years through 2015, large-cap equity funds averaged an 8.7% gain, while the S&P averaged 9.8%.” Further, “active funds overall still only beat the index 35% of the time” if viewed “over 20 years and averaged over 240 individual time periods.” But, “when only those funds with low fees and high manager ownership are included, the average return jumps to 10.1%, with those funds beating the index 55% of the time.” American Funds itself, which is “the largest actively managed fund complex with $1.4 trillion under management,” is known for low fees and “averaged a 10.7% return, beating the index 56% of the time.” Looking at 3-, 5-, and 10-year monthly rolling periods, “the case becomes even stronger for funds with low fees and high manager ownership, but it gets worse for active funds in general.”

Todd Rosenbluth of S&P Capital IQ noted that he isn’t “surprised that American funds is promoting active management, because that’s who they are,” but went on to observe that “the data is also consistent with what we’ve found.” While fund expenses are at their lowest levels in two decades, at least for some types of funds, Rosenbluth suggests that “we should be seeing more pressure on expense ratios than we have seen” because “more than half of the money in active funds is in the 10% of funds with the lowest expense ratios.” Steve Deschenbes of American Funds added that “portfolio manager ownership goes to stewardship and having interests aligned with investors,” noting that “having some skin in the game is an indirect signal of good stewardship.”