Can good stewardship improve outcomes? | Capital Group

Investment Insights

June 2018

Can good stewardship improve outcomes?

In recent years, stewardship has been a growing topic in investment research, as studies have explored how an investment firm’s people, culture and processes can influence outcomes. One area that has drawn attention is manager ownership — the extent to which portfolio managers are personally invested in the funds they manage. The reasoning is that by having a personal stake in their own funds’ results, portfolio managers’ interests are better aligned with those of shareholders, potentially resulting in better outcomes.

Ownership varies among target date series

Among target date series, manager ownership can vary significantly. In its most recent annual report1 on target date funds, Morningstar found that:

  • Only six of the series studied had at least one manager with at least $1 million invested (the highest dollar range investment firms must disclose under federal regulations).
  • Of the roughly 140 distinct target date managers Morningstar reviewed, only 13 personally invested over $1 million in their own series.
  • For American Funds Target Date Retirement Series®, all seven managers overseeing the series had at least $1 million invested.

Look for ownership in the underlying funds, too

In the context of target date series, manager ownership doesn’t just apply to the series itself. Managers can also invest in some of the underlying funds that make up the series. For example, all seven members of the Portfolio Oversight Committee (POC) that runs our target date series have invested in some of the underlying funds.2 Importantly, they also have helped manage some of the underlying funds used in the series. As a result of this experience, the management team has first-hand knowledge of the underlying funds’ characteristics and behavior in different market environments. This familiarity with the underlying funds can aid POC members’ glide path decision-making.


High ownership can potentially improve outcomes

Manager ownership is a topic we have researched in some depth. Our research found that, as a group, actively managed large-cap equity mutual funds with the highest manager ownership (at the firm level) beat indexes more often than peers with lower manager ownership.3 Similarly, Morningstar noted in a previous target date report that “funds with managers who invest alongside shareholders generally have better risk-adjusted records than those with limited or no investment.”4

 

1Morningstar 2018 Target-Date Fund Landscape Report
2As of the most recent Statements of Additional Information for the underlying funds as of May 30, 2018.
3Source: Capital Group, based on Morningstar data. Large-cap domestic and foreign equity funds were drawn from Morningstar’s Open-End Large Value, Large Blend and Large Growth categories. The U.S. index was the Standard & Poor’s 500, while the foreign index was the MSCI ACWI ex USA Index. Over rolling 10-year periods from January 1998 to December 2017, an equally weighted portfolio of actively managed funds belonging to the highest quartile of manager ownership at the firm level outpaced indexes (net of fees) more often than all active funds did as a whole.
4Morningstar 2016 Target-Date Landscape Report


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Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Although the target date funds are managed for investors on a projected retirement date time frame, the funds' allocation strategy does not guarantee that investors' retirement goals will be met. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. American Funds investment professionals manage the target date fund's portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the fund gets closer to its target date. Investment professionals continue to manage each fund for 30 years after it reaches its target date. 

Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by Capital Group, which receives fees for managing, distributing and/or servicing its investments.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.