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Rekenthaler Report

The Horse Race

American Funds versus index funds, U.S. stocks.

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A Practical Test
There's not much point in further pursuing the American Funds versus Vanguard comparison, which I discussed on Tuesday and again on Wednesday. That territory has been covered: American Funds made business decisions that helped it during the 1980s, 1990s, and early 2000s but which have since held it back. The performance of the company's funds, by and large, has been just fine.

Let's take that last part further. Today, the nearly unanimous advice from the academic community, institutional investors, and the financial media is to index. Often, the recommendation is made aggressively, with the suggestion that to do anything but index is irresponsible at best and borderline criminal at worst. (The most aggressive of attacks compared mutual fund companies to cigarette manufacturers.) Two years ago, Yale University chief investment officer David Swensen penned a highly influential The New York Times article recommending that the SEC require that financial advisors show prospective investors an index option. Wrote Swensen, "What about a requirement that every mutual fund offering be accompanied by an index-fund alternative, with the burden of proof on the vendor to justify the sale of a high-cost product?" 

John Rekenthaler has a position in the following securities mentioned above: VTI, PTTAX. Find out about Morningstar’s editorial policies.