I'm buying a little bit of American Fundamental Investors fund (ANCFX) as part of my 401k, so I'm not paying any front-end load. (I wouldn't recommend it for IRAs or other investing due to the front-end load.) This seems like a really good fund to my novice eyes, beating the S&P 500 on the YTD, 2-year, 3-year, 4-year, and 5-year, as well as almost all 1-year windows you take. The S&P500 only wins on the 1-year. Also, its expense ratio is under 0.60%, Beta under 1 and is a Morningstar 5-star fund.

Many say that managed funds can't beat the market consistently--hasn't this fund proven that it can? Anyone give me a good reason not to buy more of this fund rather than an index fund? Does anyone have further information on this fund? All comments welcome on any side, thanks. I am particularly interested in the opinions of the index fan crowd--why not ANCFX?

Obligatory: I am not a financial analyst.

As you mentioned, there is a hefty front-end, but if you can avoid it, more power to you, especially with its terrific expense ratio. It looks decent, According to the morningstar report:

http://quicktake.morningstar.com/FundNe ... mbol=ANCFX

The only thing that would make me hesitate to invest more in it is that its top ten holdings make up over 18% of its total holdings. I mean, it does appear to be fairly diverse amongst those ten, and of them it is investing in "best of breed" for the given sector, but a downturn in any of them could affect your selection. For example, Microsoft and Oracle are in the top ten, but if the tech industry took a hit again, you might too. Or if Altria gets hit with another tobacco settlement, etc. etc.

The five year record looks good, but remember that the five year window is close to making us forget about the dot-com era, and you never know when the tech sector, or any other, will get hit again.

It's a good fund... I'd say that whether or not you invest more in it depends on your investment horizon and how much risk you can afford. I'm not sure I would make it a core fund -- then again, I'm somewhat conservative in my investing -- but it's certainly a decent addition, IMO.

I believe that fund also invests in small company and international stocks as well as convertible bonds and preferrers, so I don't think the S&P 500 is a fair comparison considering those other groups have done well verses US large-cap at various times over the last few years.

You should choose a fund because its investment objectives are inline with your investment objectives (i.e. if you want a certain amount of domestic large-cap stock exposure, use a domestic large-cap stock fund), and not because its got good past numbers. I have no idea whether this is a good fund for you to own in your 401(k), but I would not recommend giving past performance any weight in your decision.

Funds do beet the market, but the longer the time frame, the fewer number of funds are in that club (typically no more than random chance allows for). Five years is not especially consistent, when you expect to be invested for decades. The real rub is identifying those funds before they beat the market. Just because the last 5 years were good doesn't mean the next 5 will be. It is too easy to mistake randomness for skill with mutual funds. Have a look at the chart below from www.indexfunds.com

This is called the efficient market hypothesis. It is pretty much true, you can't really beat the market over the long haul. The only way we think its possible is with a contrarian fund, but that may not even pan out...and I don't have research to cite for it other than the musings of a few economists.

Otherwise, I think Dylan did a good job summarizing.

Excellent point above re: comparing apples with apples.

Be careful not to compare a fund against the wrong benchmark when judging performance. Comparing a fund that holds domestic large caps as well as small caps and intl securities vs. the S&P 500 just isn't an accurate comparison. It's a bit like saying that a certain CD is especially good because it outperforms the average savings account -- they're just not the same thing.

That being said, it sounds like this particular fund has been able to do quite well without taking undue risks (i.e., it has a relatively low beta for its performance).

Great, that is very helpful. In comparison to an S&P index fund, ANCFX might be more volatile/risky in the case where these companies decline?
OK, so this warning might apply to ANCFX moreso than an index fund?

It's 401k, and I want to retire early, perhaps by 2035 when I am mid-50s, so perhaps I should be much more smart-risky than you? I'm planning on balancing my combined IRA-401k porfolio to something like:

8% ANEFX
30% ANCFX
45% DSPIX S&P Index fund
8% MMUFX (declining over time: no further buys due to front-end load)
8% Bond fund
NEVER AGAIN paying a front load

What do you think of this balance? Should more go into ANCFX than DSPIX? Less?

Another thing about me is that I don't want to spend hours and hours making this decision. (The good is the enemy of the perfect, right, JD?) A few forum posts, a few data sheets, then move on with life.

As a side note, then, what is the above retirement portfolio sorely missing?

But tell me why ANCFX can't be expected to beat the market or at least come close over the next 5-30 years? They've done it for the last fifty--was that just luck?

I thought you said you only looked back five years. In that case, yes, it could be just luck. And the fact that you are comparing it to an entirely different beast (S&P 500 which is just domestic large caps).

I thought you said 5 years.

As for why, its a simple application of economic theory. Whenever there are profits, businesspersons will see it and enter the market.This drives down market power, and therefore, profit per firm, so over time , price approaches marginal cost, and businesses are left with normal returns. There's nothing to say whether it will or not, but if it can beat the market, why aren't others doing it? Surely there's alot of bright people in other funds.

Typically, what happens is a fund gets hot for a few years and folks dump a ton of money into it. Then the market changes, and the manager is caught with his pants around the ankles, and all the folks who came in got burned because the market dynamic changed. Folks invest oddly.

Unless you are wanting to be a very active manager of funds, and treat it like a 20 hr part time job, I don't recommend trying to beat the market. I recommend instead diversifying across market indexes and running the race at the average pace.

The questions people should be asking themselves are not, "can I beat the Market?" and, "will this fund do it?" but rather, "do I need to beet the Market? and, "what is the cost if I try and fail?"

The issue is the word "market". The S&P500 is not the market -- it's just the most commonly used Large Cap Index. What you need to do is a analysis of ANCFX holdings to calculate the equivalent index combination would be. Here's my off-the-napkin analysis:

Start with market cap
* S&P500: average market cap = 53B
* ANCFX: 38B
* NAESX (Vanguard Small Cap Index): 1.5B
53B (x) + 1.5B (1-x) = 38B
Solve for X --> that gives you 71% Large Cap, 29% Small Cap. We will round to 70/30.

Next we use Morningstar's X-Ray feature to find out value versus growth:
* S&P500: 53.5% value, 46.5% growth
* ANCFX: 52.5% value, 47.5% growth
Looks about the same. We can stick with the blend indexes.

Finally, we look at international:
* S&P500: 100% domestic
* ANCFX: 66.5% domestic, 27.5% international, 6% cash

Rounding off some of the numbers, a good index portfolio to check ANCFX against is:
* 5% Short Term Bonds (Lehman Brothers 1–5 Year Government/Credit Index)
* 45% Domestic Large (S&P500)
* 20% Domestic Small (Russell 2000)
* 20% International Large (MSCI EAFE)
* 10% International Small (MSCI EAFE Small)

I'm sure the ANCFX prospectus has more detailed info on the holdings but the above is a good ballpark to check against. Without even looking up the results, I would say this portfolio would be a much tougher matchup for ANCFX to consistently beat. Small caps historically have beaten large caps by 1.5% so 30% small caps gives you a 0.5% bump with decreased volatility. The international portion has roughly the same return as domestics but due to some non-correlation, improves overall performance and volatility.

Everyone else has covered the fundamental stuff very well, so there's no reason for me to rehash it.

Given the investment choices you listed and a 30-year investment horizon, I would most heavily weight ANEFX and I would not invest in the bond fund. I probably wouldn't invest in ANCFX either. You mentioned that this is a combined IRA-401k portfolio, so presumably you have choices other than the American Funds family in the IRA portion. American Funds doesn't appear to have a small cap growth (which I would prefer over a large cap growth) and their "international" funds don't look terribly diverse (granted, I only very briefly looked at them). It's hard for me to suggest weightings without knowing everything with which we have to work, but I'd rather have a "pure" international fund to add diversification instead of that large-cap blended fund.

Wow, this is a lot of good info. Thanks to everyone, especially to those who put in some valuable minutes to look some things up and calculate it out. I really appreciate it. I have a lot of follow-up questions, but maybe I'll come back later and do them a little at a time.


So you like ANEFX (New Economy Fund) a lot better, huh? I thought we'd want to temper that in case there's another tech bust.

I can choose from:

IRA: Anything (assuming only no-load funds); DSPIX is my only monthly buy now; favor Dreyfus funds for simplicity; also own MMUFX here as mentioned

401k: ANCFX, ANEFX (my favorites as mentioned),
Dreyfus PEOPX (expensive index fund),
FRANKLIN SMALL CAP GROWTH - FSGRX
GOLDMAN SACHS MID CAP VALUE - GCMAX
American Growth - AGTHX
American Smallcap World - SMCWX
FIDELITY ADVISOR DIVERSIFIED - FADIX
FIDELITY PACIFIC BASIN - FPBFX
Other options that look bad to me: IARAX, RAGTX, ABALX, NEWFX, ETHSX

Between ANCFX and ANEFX I liked it better for long term growth. Of the full array of options you listed, I like AGTHX best of all. If that small cap growth was cheaper I probably would have picked it.

My own retirement portfolio spans 3 accounts (401k, Rollover IRA, Roth IRA) and is allocated roughly as follows:
- Small Cap Growth: 34%
- International: 31% (huge stake in China right now)
- Russell 3000 index: 15%
- Nasdaq composite: 15%
- REIT: 5%

The 401k portion of that is actually very small (5%) and is in only one fund, a small cap growth fund. The rest of my portfolio (the 2 IRAs) is in ETFs. Your mileage may vary.

The interesting and helpful comparison MossySF did above is great--I think I will look into a small-cap, mid-cap, and/or international index fund for my IRA.



Obviously there is some valid comparison--a CD is better than bank savings account assuming you won't need the money in the next 6-12 months. A bank savings account is better if you might need the money in the next 6 months. There, see? You can compare apples to oranges--they're both fruit; one is red and the other is orange; the orange is more citrusy and acidic than the apple...

It sounds like you are saying "You need to determine what kinds of investments you should have before talking about ANCFX vs. PEOPX vs. ANEFX, etc."

However, in my 401k, I need to pick one or more of the aforementioned funds, and I had pretty much narrowed it down to ANCFX, ANEFX, or PEOPX. (of course, willing to take advice on the others I listed above.)

I have read that index funds are great and I understand the reasons (no loads, low expenses, better than most mutual funds anyway). So I started this 401k putting all into PEOPX. However, it seemed to me that these factors giving PEOPX an advantage are mitigated here because (1) I don't pay any loads in my 401k; (2) ANCFX expense ratio is half what other managed funds charge; (3) PEOPX expense ratio is way too high for an index fund; (4) ANCFX has such an outstanding history and low beta. Where's the flaw in my reasoning?

Is it just that "past performance is not indicative of future results, so therefore ANCFX will probably befall the same fate as all other winning mutual funds--it will probably not beat the S&P 500 in the next 5 years (a la Dylan's graph above)"?

What else am I missing? Thanks.