Methodology: Part 3 | Capital Group

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PART 3
Methodology

Methodology

Compiling the Fund Universe

The universe of both large-cap domestic and large-cap foreign funds drew from Morningstar’s Open-End U.S. and Foreign Large Value, Large Blend and Large Growth categories. The universe of Moderate Allocation and World Allocation funds drew from Morningstar® categories of the same name. Both live and dead funds were included in each universe in order to eliminate survivorship bias. For live funds, only the oldest share class was used. For dead funds with multiple share classes, the median monthly returns were used. Results are at net asset value. If a sales charge had been deducted results would have been lower. For fee-related illustrations that include dead funds with multiple share classes, the median expense ratios were used. Due to the dynamic nature of the Morningstar database, results for the Morningstar universe may change.

Screening Process

Relying on Morningstar Direct data analysis software, we performed screens for one or more of the following criteria: downside capture ratio, expense ratio and manager ownership at the firm level.

To screen for downside capture ratio, we analyzed statistics for all rolling three-year periods in the years under study. Three-year periods were chosen because many funds that “died” did so in the first five years of their lives; therefore, using rolling periods of greater than three years would have excluded many dead funds from our study. For each rolling three-year period, we ranked all funds into quartiles by downside capture, then classified each fund based on which quartile it most frequently belonged to for all those periods.

To screen for expense ratio, we calculated quartiles based on averages of annual report Net Expense Ratios (NER) for all observed Morningstar categories for the 20-year period indicated. For funds with missing expense ratios, we filled in gaps between two available data points using linear interpolation, a statistical method used to estimate the values between two known data points in a time series.

To screen for manager ownership, we calculated quartiles using weighted averages of the midpoints of Morningstar ranges of manager holdings at the firm level. Each fund was assigned the weighted average of its firm manager holding. Funds without values were excluded from the quartile rankings.

Which screens we used and how we implemented them depended on which investment phase we were examining and how many funds qualified overall.

We used a two-step screening process, beginning with the downside capture ratio. Across each fund category, we sought the top two quartile grouping of funds with low downside capture ratio. Using this subset, we then screened for low NER and high manager ownership — the intersection of those two groups — seeking the top quartile for large-cap domestic funds and the top two quartiles (50%) for large-cap foreign, Moderate Allocation and World Allocation funds. (The number of quartiles used depended on the number of qualifying funds. Using the top quartile alone for some Morningstar categories would have yielded an insufficient number of funds for our study to be meaningful.) We created an equally weighted portfolio of qualifying funds.

The screening for large-cap domestic resulted in six qualifying American Funds: AMCAP Fund, American Mutual Fund, Fundamental Investors, The Growth Fund of America, The Investment Company of America and Washington Mutual Investors Fund. The screening for large-cap foreign resulted in two qualifying American Funds: EuroPacific Growth Fund and International Growth and Income Fund.

The screening for the Moderate Allocation and World Allocation categories resulted in two qualifying American Funds apiece: The Income Fund of America and American Balanced Fund, and Capital Income Builder and American Funds Global Balanced Fund, respectively.

For the Distribution Phase Article, A Powerful Combination for Retirees

Here we used a two-step screening process, beginning with the downside capture ratio. Across each fund category, we sought the top two quartile grouping of funds with low downside capture ratio. Using this subset, we then screened for low NER and high manager ownership — the intersection of those two groups — seeking the top quartile for large-cap domestic funds and the top two quartiles (50%) for large-cap foreign, Moderate Allocation and World Allocation funds. (Again, the number of quartiles used depended on the number of qualifying funds.) We created an equally weighted portfolio of qualifying funds.

The screening for large-cap domestic resulted in six qualifying American Funds: AMCAP Fund, American Mutual Fund, Fundamental Investors, The Growth Fund of America, The Investment Company of America and Washington Mutual Investors Fund. The screening for large-cap foreign resulted in two qualifying American Funds: EuroPacific Growth Fund and International Growth and Income Fund.

The screening for the Moderate Allocation and World Allocation categories resulted in two qualifying American Funds apiece: The Income Fund of America and American Balanced Fund, and Capital Income Builder and American Funds Global Balanced Fund, respectively.

Detailed Information About Manager Ownership and NER Screens

The Securities and Exchange Commission requires that mutual funds disclose all fees and expenses in a standardized table published in the front portion of the fund prospectus. The SEC also requires that a fund disclose in its statements of additional information (SAI) certain information about its portfolio managers, including ownership of securities in the fund. Ownership disclosure is made using the following seven ranges: none; $1 to $10,000; $10,001 to $50,000; $50,001 to $100,000; $100,001 to $500,000; $500,001 to $1,000,000; and over $1,000,000.

Information About Indexes

Market indexes referenced in this material are defined as follows:

Bloomberg Barclays Global Aggregate Index represents the global investment-grade fixed-income markets. Bloomberg Barclays U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market. Bloomberg Barclays U.S. Government/Credit Index is a market-value weighted index that tracks the total return results of fixed-rate, publicly placed, dollar-denominated obligations issued by the U.S. Treasury, U.S. government agencies, quasi-federal corporations, corporate or foreign debt guaranteed by the U.S. government, and U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity and quality requirements, with maturities of more than one year. Citigroup World Government Bond Index represents a comprehensive measure of the total return results of the government bond markets of more than 20 countries meeting certain market capitalization requirements. MSCI All Country World Index is a free float-adjusted, market capitalization-weighted index that is designed to measure results of more than 40 developed and emerging equity markets. Results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter. MSCI All Country World ex USA Index is a free float-adjusted, market capitalization-weighted index that is designed to measure results of more than 40 developed and emerging equity markets, excluding the United States. Results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter. MSCI All Country World Small Cap Index is a free float-adjusted, market capitalization-weighted index that is designed to measure results of smaller capitalization companies in both developed and emerging equity markets. Results reflect dividends net of withholding taxes. MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted, market capitalization-weighted index that is designed to measure developed equity market results, excluding the United States and Canada. Results reflect dividends net of withholding taxes. MSCI World Index is a free float-adjusted, market capitalization-weighted index that is designed to measure results of more than 20 developed equity markets. Results reflect dividends net of withholding taxes. Standard & Poor’s 500 Index is a market capitalization-weighted index based on the average weighted results of 500 widely held common stocks. S&P Global <$1.2 Billion Index includes only stocks in developed countries.

The market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. There have been periods when the funds have lagged the index. Past results are not predictive of results in future periods.

Glossary

Success rate is the percentage of time a fund (or a group of funds) has outpaced its relevant index (or peer group) over rolling periods.

Alpha is a measure of the difference between a portfolio’s actual returns and its expected results, given its level of risk as measured by beta. A positive alpha figure indicates the portfolio has generated results better than its beta would predict. In contrast, a negative alpha indicates the portfolio has lagged, given the expectations established by beta.

Beta is a relative measure of a fund’s sensitivity to market movements over a specified period of time. The beta of the market (represented by the benchmark index) is equal to 1; a beta higher than 1 implies that a fund’s return was more volatile than the market. A beta lower than 1 suggests that the fund was less volatile than the market.

Downside capture ratio reflects the ratio of annualized fund-versus-index returns for all months in which the index had a negative return.

Sharpe ratio uses standard deviation and excess return (relative to a risk-free rate) to determine reward per unit of risk. The higher the number, the better the portfolio’s historical risk-adjusted performance.

Standard deviation (annualized, based on monthly returns) is a common measure of absolute volatility that tells how returns over time have varied from the mean. A lower number signifies lower volatility.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.