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American Funds: Low Fees and PM Ownership Keys to Active Fund Success

Research by American Funds shows that low fees and portfolio manager ownership of the fund increase the likelihood that an actively managed fund will outperform its index.  According to InvestmentNews, last year, large-cap equity funds averaged a decline of 32 basis points while the S&P 500 increased by 1.41%.  However, active funds perform better when the time period is expanded to calculating returns for one year rolling periods for each month for the past 20 years – narrowing the performance gap, with the S&P 500 returning 9.8% and equity funds returning 8.7%.

Despite the reduced gap in performance over the long time horizon, actively managed funds on the whole still only beat the index 35% of the time.  However, the research shows that screening for funds with low fees and high manager investment led to outperformance of the index 55% of the time.  For shorter time periods (including 3, 5 and 10 year monthly rolling periods), the research indicates that the performance for active funds is worse in general, but better for those funds meeting the low fee/high investment screening criteria.