Well folks it appears the time to punctuate this ridiculous market with even more ridiculous active manager stories is upon us. In an Investment News article dated August 9, 2015, the author, Trevor Hunnicutt, provided the headline “Advisors remain loyal to American Funds through ups and downs”.
What’s wrong with this picture? You may ask. IMHO, everything.
Since mutual funds are merely one tool in the financial marketplace why should anyone be “loyal” to a tool? Probably a combination of laziness, irrational comfort, habituation on toys, trips, giveaways and free lunches and breakfasts, brokerage firm encouragement, and maybe the lack of true intelligence and professionalism in the financial services community.
As a former wholesaler I have literally interacted with thousands of financial planners and brokers through the years. Talk about your 80/20 world! Even in the 20th percentile, they were woefully, ignorantly, or willfully ignorant about true performance metrics. But the slavish affection for American Funds from many of them came through in spades. Of course, these were the same well-meaning people that actually believed in Morningstar’s flawed star ratings. This also included a sub-set of “fee only”, holier than thou, planners too lazy or too ignorant to do original research and justify to themselves why they are using a particular fund. Also in this bunch were Associated Persons of Edward D. Jones which firm, the last time I looked, had American Funds in an exalted position on their “preferred funds” list. All my prior research has led me to the humble opinion that American Funds is about as mediocre a fund company as you can get. For a LONG time their vastly overrated and IMHO wrongfully vaunted Growth Fund of America (GFA) garnered a lot of the attention even when it placed a high percentage of foreign stocks in the portfolio. Growth Fund of AMERICA my butt! Twice in my professional career I did in-depth performance and attribution studies of American funds. Both times, contrary to their claims, I concluded that they were not bottom up funds but rather top down. The data at that time also conclusively showed they were neither disciplined nor were they adding value through management.
Caveat emptor – buyer beware. In this article the author mentions the funds beating their benchmarks over various periods. However, since the funds, IMHO, had a tendency to hold substantial positions in non-conforming asset classes (like GFA in international stocks) one needs to be very careful in assigning an appropriate and rational benchmark against which to plot their performance. If you follow Morningstar, IMHO, the likelihood of seeing a comparison with a rationally selected and appropriate benchmark is low. Plus the citing of the funds’ performance compared with “peer groups” is, IMHO, total nonsense if one cannot discern what a real peer group is and Morningstar has never done that to my professional satisfaction. Finally, if only 20% of mutual funds tend to beat their correct relative index over a 3-year trailing rolling period then peer group classification and comparison is merely comparing the best of mediocrity against the universe of mediocrity.
I guess, if politicians are allowed to lie to us frequently and often, why not publications with ignorant writers and so-called financial planners, brokers and other financial charlatans.