How Much Can It Matter?
Choosing an investment manager with a solid track record can make the difference between success and shortfall.
- The selection of an investment manager with a proven track record of consistently outpacing the broad market is crucial. The right decision can transform long-term investment outcomes, and make the difference between success and shortfall.
- We looked at the issue through the lens of a 401(k) investor. In this example, an investor contributed $500 a month for 20 years. The same amount was invested in a blend of relevant indexes. The equity-focused American Funds produced an ending value that was $40,043 greater than the index blend, or 17% more wealth.
- This isn’t just an academic exercise. Investors have real needs and goals. The goal is to create better investment outcomes and increase the likelihood of success.
- Equities have been a major source of appreciation; they also have been a major source of volatility. Therefore, investing in equity with a history of downside resilience can be valuable in retirement.
- Our research shows that a group of equity funds sharing three traits — low downside capture, low expense ratio and high firm-level manager ownership — historically has, on average, generated strong results in withdrawal scenarios with greater risk-adjusted returns and a lower standard deviation than indexes.
- Historically, investing in these Select Equity funds would have resulted in greater ending wealth in withdrawal scenarios.
American Funds Portfolios Generated Greater Ending Wealth With Lower Volatility
Return of a hypothetical $500,000 initial investment with an initial 4% withdrawal rate, increasing by 3% each year thereafter for the 20-year period ended December 31, 2015.
- Over the life cycle of an investor, incremental gains in large-cap equity can make a big difference in retirement outcomes, which is why manager selection is so important in the core.
- The accompanying chart shows that, in the accumulation and distribution phases, a portfolio of Select Equity funds would have created greater wealth than a portfolio of index funds. A portfolio of American Funds would have done better.
- Historically, using screens to find the group of funds with the highest management ownership and lowest cost would have significantly improved outcomes during the accumulation and retirement income phases relative to a passive approach.
Investors Would Have Created More Wealth With an Select Equity Core
- The right mix of investments at a portfolio’s core can be crucial. Investing in a select group of funds with high ownership and low costs can significantly improve portfolio outcomes over time on a range of key metrics.
- Based on the average of rolling five-year periods we studied, the screened core portfolio registered, relative to the index portfolio: higher returns, higher Sharpe ratio, higher upside capture, and lower downside capture.
- Specifically, the screened portfolio’s average return was 151 basis points higher than the index portfolio’s. In short, the screened core generated greater risk-adjusted returns.
1The results for the American Funds are Class A shares. The 401(k) hypothetical $500-a-month investment represents a total of $120,000 for the 20-year period ended December 31, 2015. Data from published sources were calculated internally. For the constituents of the American Funds and index blend, as well as additional details about the data, see