Content provided by Grant Engelbart, CFA, CAIA, CLS Portfolio Manager
We are often asked about our ability to add value to a portfolio of American Funds. After all, American Funds are the largest actively-managed fund company in the United States for a reason – they are darn good. There are over 60 different American funds to choose from (some are fund-of-funds), and each has its own unique characteristics. These unique allocation differences can lead to large return differences within the American funds lineup, even within specific categories of funds. It may be quite surprising, but on average since 1990, there has been a 10% annual return difference between different American funds, regardless of asset class.
Below highlights this observation. Within each of these five categories we show the average difference between the returns of the highest and lowest fund. This may be very surprising to even some avid users of American funds – there is an average 14% annual difference between the returns of different U.S. Equity American funds over time! By only owning a couple of American funds, you may find yourself on the opposite end of this spread in certain years.
So, what can be done about this dispersion? First is to diversify your American funds holdings. Even this year we have seen some of the top performing funds from 2015 be the bottom performers this year (and vice versa). Spreading out your holdings across the American Funds lineup gives access to more asset classes, managers, and management styles. Trying to predict which funds will outperform year in and year out is a daunting (if not impossible) task, but by using a disciplined process of analyzing valuations across asset classes and styles we can allocate to funds that provide the best opportunities going forward for outperformance given their mandates.