Investment manager selection
Based on a hypothetical scenario: $40,000 initial salary, 3% annual salary inflation and 10% annual contribution starting at age 25. Withdrawal rate under all three scenarios is 50% of ending salary ($65,241).
Source: Capital Group. The demographic assumptions, returns and ending balances are hypothetical and provided for illustrative purposes only, and are not intended to provide any assurance or promise of actual returns and outcomes. Returns will be affected by the management of the investments and any adjustments to the assumed contribution rates, salary or other participant demographic information. The additional years of retirement spending are intended to represent a conservative measure. Actual results may be higher or lower than those shown. Past results are not predictive of results in future periods. Based on an exhibit from Russell Investments.
Asset-weighted methodology: Wherever possible, the Capital Advantage® research findings are based on asset weighting rather than equal weighting. Exceptions are noted and explained where applicable. Asset-weighted comparisons used in this piece use the following process: for each equity-focused fund, we gathered the respective net returns and asset sizes for all the share classes available for each period. At this level, the returns are then share class-weighted, which means the returns are asset-weighted according to the share of assets associated with each share class within each fund. Each fund is then delineated by whether it is active or passive, then grouped into its respective Morningstar category. Additionally, the survivorship rate is accounted for (i.e., once created, we accounted for whether the funds have merged or closed during the measured period. In those cases where a fund is merged or closed, its asset-weighting is adjusted to zero and its assets are distributed to all other funds in the category. For newly created funds, the weight of that fund is zero until the period in which it has reported assets, whereupon we use the standard asset-weighting to weight the returns based on asset size.). This methodology is used to more effectively portray the likely experience of market participants in the analyzed period versus an equal-weighting methodology, which is more appropriate when analyzing the performance of a specific fund over time, regardless of the size of its assets. Additionally, asset-weighting is often more appropriate when analyzing the results of an investment in an entire fund category. For example, the return of a $10 billion fund would count for 10 times as much as the return of a $1 billion fund. From there, as a fund’s assets grow or shrink relative to other funds, its effect on the category return would increase or decrease as appropriate.
Tracking low expenses and high manager ownership: In conducting our research, we searched Morningstar’s database for large-cap actively managed funds that were in both the lowest quartile ranked by expense ratio and the highest quartile ranked by manager ownership at the firm level. For this analysis, we relied on Morningstar Direct data analysis software. Least expensive quartile was calculated using annual report Net Expense Ratio (NER) for all observed Morningstar categories for the period indicated. For share classes with missing expense ratios, gaps between two available data points were filled in using linear interpolation. Linear interpolation is a statistical method used to estimate the values between two known data points in a time series. After interpolation of share class expense ratios, fund expenses are based on an average of the expense ratios of the underlying share classes where each share class is weighted according to the amount of assets it had at the time relative to the fund as a whole. Highest manager ownership quartile was calculated using weighted averages of Morningstar screens of manager holdings at the firm level. Each fund was assigned the weighted average of its firm manager holding. Funds without values were excluded from the quartile rankings. The combination of least expensive NER and highest manager ownership quartiles was the result of a cross-section of the two screens. Only those funds with both the lowest expense ratios and the highest manager ownership were included.
Size of quartiles varies because those funds in the Morningstar database that did not include an expense ratio or firm-level investment ownership were excluded from the analysis.
The Securities and Exchange Commission (SEC) requires that mutual funds disclose all fees and expenses in a standardized table published in the front portion of the fund prospectus. The SEC also requires that a fund disclose in its statements of additional information (SAI) certain information about its portfolio managers, including ownership of securities in the fund. Ownership disclosure is made using the following seven ranges: none; $1 to $10,000; $10,001 to $50,000; $50,001 to $100,000; $100,001 to $500,000; $500,001 to $1,000,000; and over $1,000,000.
Downside capture: Capture ratio reflects the annualized product of fund versus index returns for all months in which the index had a positive return (upside capture) or negative return (downside capture). Downside capture versus the appropriate market benchmark is calculated annually for every share class (alive and dead). A share class must have at least 36 months of returns to generate a capture result. Downside capture for each category is weighted by each fund’s average net assets by year.
Privately held: As of 2017, we classified larger fund families as those with at least $10 billion in assets as well as those with at least 10 years of return history as of 2006, which were then categorized by whether they were publicly (i.e., owned by public shareholders) or privately held. The results were then categorized by whether the fund families were managed by dedicated asset management firms or were part of an organization with other products or services, including banks, insurance companies and institutional financial services. We then compared the returns of all private versus public dedicated asset managers and the returns of privately owned asset managers versus all public financial institutions, including dedicated asset managers.
Survivorship: Family fund survivorship is calculated based on the ratio of live funds to total funds (which includes live, liquidated and merged). Fund family excess returns (based on the excess return of equity funds over their respective stated primary benchmark) are time-weighted (funds with more history are weighted higher) and are generated by all equity funds offered by the family at any point in time. The exhibit focuses on peer fund families that manage over $10 billion in assets under management and have generated at least 20 years of returns as of 2017. To create the fund family composite, we weight these funds according to the amount of assets they have at a given time. These numbers are calculated over the full 20-year period and then annualized.
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