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The Stockpicker's Last Stand

The bleeding has stopped at Capital Group, the $1.4 trillion money manager that operates the American Funds family of mutual funds. Investors pulled $250 billion from the Growth Fund of America and its siblings from 2008 through 2013. Redemptions, which peaked at $81 billion in 2011, declined to $19 billion last year and have ended in 2014, according to Morningstar (MORN) data. The company stemmed the outflows by improving its performance, hiring more salespeople, and promoting its belief that traditional stockpicking, if practiced by the right people, can beat the market averages over the long haul. “We believe in what we do even if at times the world doesn’t,” says Timothy Armour, head of mutual funds.

Armour and his boss, Capital Group Chairman James Rothenberg, are speaking up for active management at a time when more investors are accepting the futility of trying to beat the market and putting their money in index funds. As of Oct. 31, only 1 in 10 actively managed U.S. equity funds had beaten the Standard & Poor’s 500-stock index over the previous year. For five years, the figure is 33 percent, and for 10 years it’s 49 percent. Funds run by stockpickers suffered withdrawals of $5.7 billion in the first 10 months of the year, while stock index mutual funds and exchange-traded funds (ETFs), almost all of which mimic indexes, took in $201 billion.

Prominent investors, including Warren Buffett, are saying that hiring stockpickers is often a waste of money. In a March letter to shareholders, the Berkshire Hathaway(BRK/A) chairman said he told the trustees managing his affairs that after his death he wanted 90 percent of the cash he leaves for his wife put into a low-cost S&P 500 index fund. The results, Buffett wrote, are likely to be “superior to those attained by most investors—whether pension funds, institutions, or individuals—who employ high-fee managers.” In his letter, Buffett recommended a fund run by Vanguard Group, the leader in cheap funds that track indexes. Vanguard’s mutual funds attracted $400 billion in the same six years Capital Group shed the $250 billion, according to Morningstar.