American Funds’ Investment Company of America Smoked Vanguard’s S&P 500 Index Fund

I learned about American Funds during my PaineWebber days. A few of the brokers (though not enough in my opinion) used American Funds for their clients’ portfolios. One of the funds I liked from American Funds was the Investment Company of America. Yes, it had a front-load. But, the annual management expenses were quite low compared to other funds. I also liked the team approach to investing.

After I left PaineWebber, I quit following American Funds until the other day when I came across some old fund literature I had kept (yeah, I’m a recovering pack rat). Their numbers looked pretty solid so I decided to look them up to see how ICA performed over the last 10 years. Turns out they did pretty well considering what we went through over the last ten years. I decided to compare ICA’s performance with Vanguard’s S&P 500 Index Fund.

I assumed the following:

• a $100,000 lump sum investment placed on December 31, 1999 and held through December 31, 2009.

• a 4.5% front load on the ICA shares.

• the funds were held in an IRA so taxes were not an issue.

• all dividends were reinvested.

Here is the chart of the comparison:

The value of the ICA (Class A) shares (after the 4.5% front load) was $122,257 at the end of 2009 while the value of the Vanguard S&P 500 Index Fund shares was $90,165. That’s a $32,000 difference. Had the ICA shares not had the front load, the end value would have been over $128,000.

Now, the numbers would have been totally different had you used a different share class. I’ll rerun the numbers using the C-Shares, which do not have an upfront load but carry a 1.46% management fee compared to .66% for the A-Shares. Unfortunately, it can’t be an exact comparison because the C-Shares haven’t been around as long. I’ll use the last five years as a comparison.

The numbers also would have looked much different under a dollar-cost-averaging scenario since every purchase of the ICA shares would have been subject to the sales load.

Also, it’s important to note that not all load mutual funds are created equal. American Funds has a great reputation of holding costs down. Not all mutual funds take the same approach that American Funds does. I just wish their funds didn’t levy sales loads.

13 thoughts on “American Funds’ Investment Company of America Smoked Vanguard’s S&P 500 Index Fund”

  1. Interesting how you started at Dec 1999 rather than Jan 1999. You would have a different result. There’s no doubt you lose when you don’t index invest. It’s settled. Nobody can time the market. They can only be lucky. Those who get the fees can certainly manipulate the numbers to make it appear to be that’s its good to pay fees.

  2. Bob,

    I started with December 1999 for a ten-year comparison. Just for fun, I’ll go back to December 31, 1998 and see what happens.

    You act as though I have some ulterior motive.

  3. If the stock market is modeled as being entirely composed of mutual funds, it is mathematically impossible for all actively managed funds to have worse performance than the index. In fact, assuming a normal distribution of returns, the number of actively managed funds which do better than the index in any given year will be close to but somewhat less than half depending on costs.

    So, congratulations? You flipped the coin and it came up heads. A truly superior analysis!

  4. Dan,

    But the stock market is not entirely composed of mutual funds. Also, some actively managed funds include loads (such as the American Fund discussed), which hurts return. Not sure I understand what you’re saying.

  5. Luke,

    I know exactly what Dan is saying…

    He’s saying that investing in mutual funds is a zero-sum game and that investors are worse off on average investing in actively-managed mutual funds because of the fees.

  6. You’re comparison is not completely accurate; ie you are comparing apples to oranges. I know most mutual fund companies compare themselves to the S&P but it’s not a fair comparison. Some if not all actively managed funds hold some bonds and/or cash and are not fully invested at all times which helps when stocks dip down.

    You should compare American Funds return to indexes containing the same asset allocation and see if they still “beat the index”.

  7. It’s called data mining…I don’t think you do have an ulterior motive on this, but it is data mining nonetheless.

    The general idea here is…Do active funds beat their index? Sure and they do so with decent efficiency over 5-10-years, but the catch is having an active fund beat the index over 20-30 years. What is there 23,000 mutual funds? Of course a few will beat the matched index, but it is complete luck. In hindsight, of course you can find an American Funds fund like ICA that beat the Vanguard fund over 10-years.

    And I would be curious of the American Funds fund vs. Vanguard 500 fund comparison for 20 and 30-years ago. Was the ICA account around that far back? Will it be here in 20-30 more? The longer they are around, the more difficult it is to beat the index over the long haul…

    Also, good point JC!

  8. Luke,

    It’s not data mining. I was not out to find something that would beat the index. I was just comparing the two. ICA has been around since 1934.

    Although it is a blended fund, Morningstar compares it to both the total return for the S&P 500 Index and for it’s category (see here).

  9. JLP..

    Can’t stress it enough, I don’t think you intentionally pulled this data to get your conclusion, but what I am suggesting is that after the fact, you have simply plucked 10-years to compare two funds, one which has been around for 35-years, the other for 75-years. Plucking 10-years worth of data and using the tag line “smoked” is a bit much, unless you have done a few more steps IMHO.

    If ICA has been around since 1934, there shouldn’t have an issue getting data going back to 1976 when the Vanguard S&P 500 was formed. I would be curious to see if a.) ICA was indeed a large blend type fund for the full 75-years and didn’t undergo any major changes and b.) a broader comparison of the two funds from 1976. Aren’t you curious about that one?

    And the other questions to ask would be how many large blend funds were there in 1976 along side these two and how many are around and beat the Vanguard fund?

    And even if ICA still “smokes” the Vanguard S&P 500 after fees dating back 35-years, will they do so for the next 35-years? If not, which one of the 40 or so mutual funds that American Funds offers will?

  10. According to my eyeballing the ICA Certified Shareholder Report on and using the CNNMoney investment return calculator here are the numbers:

    1989-1999: ICA 16.01% vs. 18.19% S&P
    20-year: 9.05% vs. 8.19%
    30-year: 11.97% vs. 11.22%
    40-year: 11.04% vs. 9.86%
    76-year: 12.2% vs. 10.6%

    A $10,000 investment in ICA had grown to $58,481,101 versus $21,257,508 in the S&P.

    Pretty impressive. ICA is basically a closet index fund right now so I’d bet on the S&P 500 going forward but American Funds does have good management and has done well. They use a value approach which has beaten the market over time so they might be able to continue to do so going forward.

  11. A $10K investment WHEN grew to $58,481,101? Back in 1934?

    Does this take into account American Funds higher fees and front end loads?

    The direct comparison between ICA and Vanguard 500 can only go back to 1976…

  12. January 1, 1934. Yes, the 76-year return includes the sales charge. The other numbers I provided do not. This is the actual S&P 500 numbers according to the report which would have done slightly better than the Vanguard Index without the management expenses.

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