Capital Group Cos., the $1.2 trillion firm that ran the world’s largest stock mutual fund before being overtaken by low-cost indexing competitors, said the advantages of active stock picking have been drowned out in the debate over how individuals should invest.
“The only voice that’s been out there is the passive voice,” James Rothenberg, chairman of Capital Research & Management and the company’s top executive, said in an interview in New York. “We don’t entirely agree that the answer for all people is indexing. In fact there can be a significant advantage to active investing.”
The comments are a rarity for the closely held firm that has issued three press releases in its 82-year history and is known for shunning the media, and they highlight how much investor preference has shifted. The firm’s American Funds have lost $242 billion to withdrawals since the end of 2007, while Vanguard Group Inc., the largest index-fund provider, has attracted $607 billion, according to Morningstar Inc. Capital Research & Management is a unit of Capital Group.
Capital Group, based in Los Angeles, in a study released today, argued that its stock-picking mutual funds outperformed their benchmark indexes in the majority of almost 30,000 periods examined over the past 80 years. That included 57 percent of one-year stretches, 67 percent of 5-year periods and 83 percent of 20-year ranges.
ETF Competition
“Capital Group has been harmed by their reluctance to respond to the competition from ETFs,” Daniel Wiener, chief executive officer of Newton, Massachusetts-based Adviser Investments, said in an interview. “At some point they have to take a more aggressive stance.”
Active funds employ managers who select individual securities they believe will beat a given benchmark, such as the Standard & Poor’s 500 Index of U.S. stocks. Index funds aim to match the benchmark by purchasing all the components of the index. Because they don’t have to pay salaries for active managers and research costs, they typically have lower fees than active funds.
John C. Bogle, Vanguard’s founder, has led the charge for indexing since the 1970s when he began popularizing passive investing. Bogle has argued that the average active manager, after fees, fails to beat the market. Active managers who do outperform, he said, can’t repeat the feat with enough predictability to merit a long-term investment.
Investors have listened and put $1.16 trillion into U.S.-registered index mutual funds and ETFs since the end of 2007, compared with $454 billion deposited with active mutual funds, according to data from the Investment Company Institute. In that time, passive assets have grown to 31 percent of the U.S. fund industry, from 18 percent on Dec. 31, 2007.
Rothenberg’s ‘Frustration’