Investment Philosophy

Investing Redefined

We believe that average investment strategies are not okay. We seek to build portfolios specifically to help generate greater wealth at a lower risk. There is a widely held perception that investors are better off placing the bulk of their portfolios in passive investments and settling for average outcomes. While past results are not predictive of results in the future, research shows that funds that share specific characteristics have tended to outpace market indexes and the broader universe of active managers over time.¹

2 Keys For Greater Wealth Accumulation

During wealth accumulation, we screen for funds that have key traits. Research shows¹ that actively managed funds that share two essential characteristics — low expenses and high manager ownership — can give investors an advantage.

3 Keys For Retirement Income

To meet the complex challenges of retirement, our philosophy is to select investments that can help to provide a sustainable income stream, while offering a measure of resilience during market declines. Research shows² that three traits shared in a fund consistently helped to outpace benchmark indexes in the retirement distribution phase — high firm manager ownership, low expense ratio, and low downside capture ratio.

The Combination of Traits

Low Expenses: We identify funds in the Morningstar database that rank as some of the least expensive. Funds with lower expense ratios have a lower bar to clear in order to beat indexes.
High Manager Ownership: We then identify investment firms in the Morningstar database whose managers invest more of their own money into the funds they manage. If managers are invested in their own funds, their interests are likely to be better aligned with investors’.
Low Downside Capture: We also identify funds in the Morningstar database that have low downside capture by comparing a fund’s return with an index’s during periods when the index return was negative. In other words, lower downside capture ratio indicates that the fund did better in bad markets.

References

1. “Capital Idea: Expect More From The Core” 2016. Research from American Funds and Capital Group. Based on Morningstar data. Domestic funds are those in the Morningstar Open-End Large Value, Large Blend and Large Growth categories. International funds are those in the Morningstar Open-End Foreign Large Value, Foreign Large Blend and Foreign Large Growth categories. Moderate Allocation and World Allocation funds drawn from Morningstar categories of the same name. Size of quartiles varies because those funds in the Morningstar database that did not include an expense ratio or fi rm-level investment ownership were excluded from the analysis. Morningstar universe as of April 15, 2016. Fee and manager ownership data as of December 31, 2015. Based on monthly returns. See Appendix for methodology and description of fund categories. U.S. index is S&P 500. Foreign index is MSCI All Country World ex USA. In order to provide a more relevant comparison, Capital Income Builder and The Income Fund of America were compared to their Morningstar benchmark index blend as follows: 60% S&P 500 and 40% Bloomberg Barclays U.S. Aggregate indexes for the Moderate Allocation index and 60% MSCI All Country World Index and 40% Bloomberg Barclays Global Aggregate Index for the World Allocation index. The indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.

2. “Key Steps to Retirement Success: How to Seek Greater Wealth and Downside Resilience” July 2017. Research from American Funds and Capital Group. Based on Morningstar data. Based on monthly returns. Average annualized returns are at net asset value and include withdrawals. See Appendix for methodology. U.S. funds are those in the Morningstar Open-End Large Value, Large Blend and Large Growth categories. International funds are those in the Morningstar Open-End Foreign Large Value, Foreign Large Blend and Foreign Large Growth categories. Moderate Allocation and World Allocation funds drawn from Morningstar categories of the same name. Moderate Allocation index is 60% S&P 500 and 40% Bloomberg Barclays U.S. Aggregate indexes. World Allocation index is 60% MSCI All Country World Index and 40% Bloomberg Barclays Global Aggregate Index. U.S. index is S&P 500. Foreign index is MSCI All Country World ex USA. The market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.