Via Twitter [on 5/17/2012], Dave Ramsey posed the following:
“I own a mutual fund with a 11.98% average return since 1934, 13.4% average over the last three years. Is your investment adviser too STUPID to find this?”
It’s not about STUPID. And this is a really good fund. The specific fund is American Funds ICA (AIVSX) and has — as Dave cited — been in operation since 1934, delivering solid results.
Be careful with averages. It’s better to measure performance of the fund using annualized returns — and going back over the last three years (thru 5/17/2012) — the annualized return for AIVSX is 12.8%. That sounds pretty good and it is — but the return on the S&P 500 (VFINX) over the same three years is 16.6%. So, AIVSX has lagged the S&P 500 by -3.8%/year for the trailing three year period.
We know better than to pass judgment on the basis of 1-year or 3-year periods and so does Dave. In fact, AIVSX outperformed the general stock market benchmark during 30 of its first 50 years of operation. An “outperformance accuracy of 60%” is exemplary. The won-loss record now stands at 43-35 (55.1%) over 78 years and performance has lagged for the last 28 years, denting the long-term record with a performance accuracy of 13-15 (46.4%) over more recent history.
We can look back at 78 years but many of us have a hard time wrapping our brains around that span. So we’ll take a closer look at three decades. Over the trailing 30-years, AIVSX has delivered an annualized return of 10.8% during a period when the S&P 500 advanced 9.9%. A relative return of +0.9%/year may not seem like much but the difference is significant. As the following graphics show, this relative return has been slipping in recent years but was bolstered by strong performance at the turn of the century.
Here’s a look at relative return (since 12/31/1982):
Small Differences in Returns/Expenses … Huge Leaps for the Long Term
As Dave often points out, constraining expenses and small differences in annualized returns can make a huge difference in long term results. As a case in point, 10.8% may not seem like that big of a difference vs. 9.9% over thirty years.
But $1000 grown at 10.8% over 30 years reaches a value of $21,687. That same $1000 invested in the S&P 500 (VFINX) and growing at 9.9% attains a value of $16,980. Most of us here like $21,687 better than $16,980.
Small incremental advantages can make massive differences from the long-term perspective. As another case in point, the investment club known as the Mutual Club of Detroit delivered 13.4% from 1941-2001. If 13.4% were achieved over the 30-year period cited, the $1000 grows to $42,354.
Make no mistake. AIVSX is a solid fund offering. Funds with a relative return of 0.9% are actually pretty rare.
An expense ratio of 0.61% and portfolio turnover of 28% place AIVSX in rare company among the alternatives. Our analysis of the holdings suggests a portfolio capable of generating 11.8% projected returns with an overall excellent quality rating. But that 5.75% front-end load is confiscatory and knocks 0.2%/year off the performance over those three decades — and we’ve shown that small differences matter. Perhaps Dave could use his considerable influence to persuade the industry to reduce those transaction costs … after all, this isn’t the 1980s and these types of loads have not tracked reductions seen in almost all areas of investment services.
No-load would be good too. There are a number of attractive alternatives to AIVSX these days as the team works on improving overall results. Funds like Fidelity Blue Chip Growth (FBGRX) with a return forecast of 14.5%, even better quality (vs. AIVSX) and Vanguard U.S. Growth (VWUSX) with its return forecast of 13.6% … and you’ll find that the holdings in these portfolios are not dramatically different than AIVSX.
AIVSX is in good standing at +0.9% over 30 years — but they’re not alone.