American Growth Fund of America – An Example of Things That UPSET Me!

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Recently, while on an extended weekend trip to the beach in Hilton Head, South Carolina, I was reading the June edition of Kiplinger’s Personal Finance Magazine.

An interesting section included in each edition of Kiplinger’s is a listing of the 20 largest stock mutual funds, ranked by size (net asset value). The top 5 funds on the list are shown below:

Kiplinger’s List of Top 5 Mutual Funds by Asset Size

1. American Growth Fund of America – Symbol AGTHX = $165.2 billion
2. Vanguard Total Stock Market Index Fund – Symbol VTSMX = $164.0 billion
3. American Europacific Growth Fund – Symbol AEPGX = $113.3 billion
4. Vanguard 500 Index Fund – Symbol VFINX = $109.4 billion
5. American Capital World Growth and Income Fund – Symbol CWGIX = $82.2 billion.

In reading down the list, one thing that shocked me was how many American brand mutual funds had high rankings. In fact, as you can see, they have 3 out of the top 5 spots! Wow!

This surprised me because I would have thought that Vanguard and Fidelity would take the highest places. However, Fidelity didn’t rank on the list until the number 6 spot, with the Fidelity Contrafund, Symbol FCNTX = $79.4 billion.

After inspecting the entire list, I began to feel slightly embarrassed that I wasn’t at all familiar with American brand mutual funds. So naturally, I began to do some research on the company in general and specifically, on the highest net asset value mutual fund in the world, the American Growth Fund of America. In addition, I wanted to find out how it compares to a very logical (in my biased opinion) highly ranking pick on the list, the Vanguard Total Stock Market Index Fund.

In searching around the Internet and Google Finance, I was able to find the following information on the two top-ranked mutual funds by assets.

American Growth Fund of America

  • Is an actively managed mutual fund (a big no-no in my book of passive investing).
  • Has an expense ratio of 0.69% (not all that bad for an actively managed fund).
  • Charges a front-end sales load of 5.75%. Wow!!! This is ridiculously high!
    • This means that 5.75% of all money invested in this fund gets paid to brokers and/or American Mutual Funds. What a rip off! This upsets me.
    • Just to give you all an idea of how much money this translates to, 5.75% of the fund’s asset value of $165.2 billion would be a whopping $9.5 billion! Wow!
  • More information can be found at Google Finance – AGTHX or at American Funds.

Vanguard Total Stock Market Index Fund

  • Is a passively managed mutual fund, that seeks to mimic the return/performance of the MSCI US Broad Market Index, so no individual stock selection is involved.
  • Has an expense ratio of only 0.18%
  • Charges no sales loads.
  • More information can be found at Google Finance – VTSMX.

Why Do So Many People Invest in the American Growth Fund of America?

After examining the characteristics of each of the top two highest ranking funds, I began to wonder, “What makes SOOOO many people/investors place their money in to the American Growth Fund, knowing that it charges a 5.75% fee before they earn you any money at all?!”

The only two reasons I could come up with are shown below:

  • American Mutual Funds earn investors more money over the long-term.
    • This is sort of my optimistic side talking. I just hope that this is truly the case!
  • A more likely explanation in this day and age is that American Mutual Funds simply spend more money/effort advertising their funds’ popularity to 401k providers and individual investors.
    • This explanation seems to be supported by one article I found on the Internet at ToolsForMoney.com.
    • Another related issue here is something I was reading in an investing book 4 years ago when I was just learning/beginning to save money. Essentially, the belief of the authors was that a sadly large amount of investors invest in a mutual fund solely because the name “sounds” good. 
      • It would be reasonable to think that a lot of Americans would choose American brand mutual funds because they identify with the name.

Performance Comparison – American Growth Fund of America vs. Vanguard Total Stock Market Index Fund

Overall, there’s not much to be studied or analyzed about too many people investing in the American Growth Fund because of the name or because of proactive advertising. However, I was very interested in the first bulleted reason above – do people invest in the American Growth Mutual Fund because it provides superior performance?


To find an answer to this question, let’s take a look at the fund price information/performance over the past ~15 years….

Analysis Set-Up/Goal


As mentioned above, the goal of this analysis is to determine (on a after-fees basis) whether or not the American Growth Fund of America or the Vanguard Total Stock Market Index Fund performed better since 1996. In the analysis, we’ll examine the performance/growth of a $10,000 initial investment and $500 monthly follow-up investments in each fund.

Note: 1996 was chosen because that was the date of inception of the Vanguard Total Stock Market Index Fund. Historical price information was taken from Yahoo Finance.

Remember, 5.75% of all money contributed to the American Growth Fund will be taken out of the investor’s portfolio to pay the sales load. Nice right?!

Results


The complete results of my 15 year performance analysis can be found at the shared spreadsheet at the link below. Just download a copy to play around with the numbers if you want!

In examining the table above, it quickly becomes apparent that the more “popular” and “sexy” actively managed, American Growth Fund of America underperforms the Vanguard index fund by 8% over the time period analyzed.

Definitely, a large factor in the underperformance of the American Growth Fund stems from the 1) higher expense ratio (which is already factored in to the daily price of the fund) and 2) the high front-end sales charge! In fact, over the ~15 year period, you end up almost paying $6000 in fees to American Funds and other brokers.

Conclusions

From this analysis, we were able to conclude several valuable things. These are summarized below:

  • Just because a fund is “popular,” doesn’t mean that it is necessarily going to provide superior performance/returns.
  • Following the crowd isn’t always the smartest course of action.
  • Shared Google Spreadsheets are the best invention ever!
  • Expense ratios and especially sales loads can significantly eat in to investor returns.

And finally, at least in my mind, this once again reminds us why passive investing offers superior returns to active management!

How about you all? Are you familiar with American brand mutual funds? Why do you think they are so popular/widely invested in? Do they offer a superior product? 


Have you ever invested in a mutual fund or stock just because you thought the name was “catchy?”


Share your experiences by commenting below!


***Photo courtesy of http://www.flickr.com/photos/zachklein/54389823/sizes/o/in/photostream/

Comments

  1. Have you considered that it may not be popularity, but it may be one of very few choices for a 401K investment. Many companies set up their 401K with 5-10 choices. American may have taken a large share of that business. In my 403B, I do not have a lot of choices, particularly if I want a mutual fund vs. an annuity.

    • Thanks for reading Krantcents. I definitely considered that. However, I have never personally heard of any 401k's carrying American mutual funds, so my experience is limited!

      I'd be interested if any one out there has experience with this!
      My recent post June 2011 Financial Goals Update – Short Term- Mid-term- and Long Term

      • I just heard from a reader that said that the American Growth Fund here is a big choice in his 401k administered by Merrill Lynch.
        My recent post Dollar Cost Averaging vs Dollar Value Averaging – Which Is Better

      • I have this fund in my 401k. I'm guessing you used the class A shares in your example. Here is what I'm actually buying.
        http://quote.morningstar.com/fund/f.aspx?t=RGAEX

        • Thanks for sharing Slinky! I admit I was quite surprised at the volume of different share classes this fund offered!

          With the fund that you're buying, what is the expense ratio and front end expense / sales load?
          My recent post My Personal Finance Journey Vs. The United States of America – Round 2 – What Interest Rate is Your Savings Account Earning?

  2. I am familiar with American and despise them for the 5.75% load which I am surprised is still possible in this day and age. Why are human resource departments offering up load funds anyway? Don't they have a fiduciary duty to their employees? I suppose someday there will be a lawsuit based upon the information you provided above with some retired employee demanding the difference between a load and no load fund.
    My recent post Four Ways to Make Money in Real Estate

    • I'm with ya cashflow! I just don't understand why people would be paying 5.75% loads. However, the sad thing is that they probably don't even realize that they are paying it.
      My recent post June 2011 Financial Goals Update – Short Term- Mid-term- and Long Term

  3. Like Krantcents said, it may be a 401(k) choice, and if so, the load may be much smaller or waived (hoping….otherwise it is a total rip!).
    My recent post 5 Worst IRA Mistakes Made Everyday

    • Thanks for reading Robert! That's a good point. I don't have a lot of experience buying “loaded” mutual funds. However, the 5.75% load was the “max load,” so hopefully, people pay less than that!
      My recent post June 2011 Financial Goals Update – Short Term- Mid-term- and Long Term

  4. Came here to say the same thing KC's mentioned. It's not by investors choice but by 401K providers choice.

    My 401K has American but no Vanguard funds. When folks sign up, your 401K provider gets a decent cut. Vanguard doesn't offer much incentives for 401K providers.

    • Sorry it took me a while to get to answering your comment MoneyCone! I agree though. I didn't think of that…By having the load on the fund, 401k providers probably have a little more of a chance to make money…sneaky!
      My recent post Tour de Personal Finance, Stage 3, Posts 27-30

  5. chillywilly says:

    I am young and inexperienced, however, the chart show AF making more when I subtract the 5,750 from the value of 172,430 (166,680 vs. Vanguard's 152,258 value. What am I missing?

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