Capital Group Breaks Silence to Defend Active Management

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. (MORN) 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 (SPX) 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’

“The frustration is with the stridency of the point of view on one side,” Rothenberg said. “We have a body of data that suggests something different.”

American Funds, the third-biggest mutual-fund family in the U.S., oversees $993 billion, excluding money-market funds, Morningstar data show. Vanguard’s mutual funds and ETFs total $2.1 trillion, with the majority in index-based products. Boston-based Fidelity Investments manages $1.1 trillion in mutual funds.

Capital Group’s largest offering, the $123 billion Growth Fund of America, has seen its assets drop 31 percent in the five years ended Aug. 31. During that time the fund returned an annual average of 6.4 percent, compared with 7.3 percent for the S&P 500.

Since July 2011, three funds have surpassed Growth Fund of America in size. All are index funds run by Vanguard.

‘Hit a Wall’

“After decades of really great success, they hit a wall and suffered subpar performance in the 2008-2009 period,” Burton Greenwald, a mutual-fund consultant in Philadelphia, said in an interview. “They’ve got a lot of mending to do in terms of their reputation.”

The Capital Group study examined 17 of the company’s mutual funds that invest in equities or both equities and bonds. It measured their performance over every one-, three-, five-, 10-, 20- and 30-year period, on a rolling monthly basis, from Dec. 31, 1933, through Dec. 31, 2012.

Rothenberg, 67, said the company has put in place a succession plan for his retirement, though no date has been set yet.

Timothy D. Armour, president of Capital Research & Management, was the “logical” person to take over as chairman when he steps down, Rothenberg said, and a core of younger executives had already taken over most decision-making on the firm’s management committee, the senior-most executive body.

That group, he said, includes Armour; Rob Lovelace, grandson of founder Jonathan Bell Lovelace; Shaw Wagener and Darcy Kopcho.

“We’ve already put in place that next generation,” Rothenberg said. “Increasingly they make the decisions, not me.”

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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