How A Change in Investors’ Investment Philosophy Impacts Mutual Fund Companies

On August 6, 2012 I read an interesting article in the Wall Street Journal about American Funds, one of the largest mutual fund families and Vanguard Group, now the largest fund family.  Over the past 4 ½ years American Funds has experienced a net outflow of over $200 million in investor funds while Vanguard saw an increase of $452 million for the same period.  These very divergent results of inflows and outflows of investor dollars stem from the change in investors’ investment philosophy away from American Funds core funds and to investing in index funds and Exchange Traded Funds (ETFs).


American Funds takes an active management approach to investing.  Its investment managers adhere to the traditional philosophy of purchasing stocks that are in line with the fund’s investment strategy.  These funds attract passive investors who look to a fund manager to make specific investment decisions.  Like most mutual funds, these funds are valued daily based on the net asset value of the underlying stocks the fund holds.


Vanguard is the leader in index funds and ETFs.  These funds track indexes in stocks, bonds, or other commodities and are traded similar to stocks.  They have intra-day valuations and, since they are unmanaged, typically have a lower management fee than a managed mutual fund.


Since the financial meltdown, many investors and investment advisors are pulling away from the traditional buy and hold strategy that is the hallmark of American Funds investment philosophy. Further, American Funds, who typically invest in well established, value companies, has not had stellar results ending in the 49th percentile rank versus its peers based on returns over the last five years.


Many investors are now taking an active approach to investing and choosing to invest in Vanguard’s index and EFT funds.  With their lower fees and intraday liquidity, these funds offer a good alternative for investors to get exposure to various market segments.  These investors believe over the long run they can achieve superior investment results than mutual fund managers.


The big question is will the small investor who chooses to manage his own portfolio using index and EFT funds have the discipline to make the difficult choices during difficult times.  Many investors suffer from emotions getting in the way of making sound investment decisions only to be whipsawed by the gyrations of an unemotional stock market.  Only time will tell which investment approach yields superior results..


Disclaimer: I own both American Funds and Vanguard mutual funds.

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