By JLP | April 27, 2010
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.