401(k) · Fees · Investing

How to Evaluate An Investment Option using AGTHX

As with anything investment-related, see my disclaimers. Investing involves risk. My analysis is provided solely for entertainment purposes and in no way do I recommend any course of action. Don't trust random idiots like me on the internet for investing advice. Or for anything else, for that matter.

The other day, a friend asked me to tell them what I thought about one of the options in their workplace 401(k), “The Growth Fund of America” by American Funds, ticker AGTHX. To evaluate an investment option, I generally look at three things: objective, fee structure, and benchmark performance.

What is AGTHX?

AGTHX is an actively managed growth-oriented mutual fund, founded around 1973, and has only 3 out of 5 stars at Morningstar. It has a rough mixture of 9:1, US stocks to non-U.S. stocks, and no bonds. It’s heavily weighted towards large-cap stocks.

AGTHX could be a good investment option if that’s the objectives you’re looking for.

What’s a Front-End Load Fee?

The next place I look at is the fund’s fee structure. Why? Fees have a huge impact on fund returns. The larger the fees, the harder it is for a fund to outperform alternative funds.

The first fee I noticed was a front-end load fee of 5.75%. That means, if you put $100 towards this investment option, you’d immediately have only $94.25 worth of AGTHX. Yikes!

A front-end load is a sales fee paid to whoever connected you with the fund in the first place. Loads are one-time fees, paid each time you buy shares of the fund. That means that every paycheck contribution and every time you switch into the fund from other 401(k) options, you’ll get hit with the fee. This encourages you to stay in the fund longer and not switch to other funds within your 401(k).

What’s an Expense Ratio?

The second fee to look at here is the AGTHX’s expense ratio of 0.64%. The expense ratio is an annual fee baked into the net asset value (NAV), i.e. the daily price of the fund. Unlike a sales load, this fee continuously weighs on the fund performance. Over time, say 30 years in AGTHX’s case, the expense ratio of a sales fee can exceed the effect of the load. After 15 years, AGTHX’s expense ratio crosses over and begins to matter more than the sales load. Here’s a chart that shows the effect, using an annual 8% return:

How about performance?

I’m not 100% against fees. If fund A has a higher expense ratio than B, but A can beat B’s performance by at least as much as the difference between the fees, then A is a clear winner.

The nuance here is that word “always”. Put simply, fees drag on a fund’s performance, and it’s a rare fund manager who can out-perform their benchmark. The group of fund managers who can beat the averages over 5 years is larger than the group who can beat the averages over a decade.

I think there may be fund managers who can consistently beat their benchmark, but I doubt my own ability to find them. You may think that using past performance as an indicator for future results (a.k.a. return chasing) will find these fund managers. If only it were that easy.

How does AGTHX perform against its benchmark?

First, I think it’s a little odd that the Capital Group, the company beyond the American Funds, by default pits AGTHX against the S&P 500 for a benchmark comparison. Why? AGTHX is a “growth” fund, while the S&P 500 includes both growth and value companies. Comparing against the S&P 500 is an apples-to-oranges comparison that favors AGTHX. Here’s a screenshot from their website comparing the two:

It should be noted that you can change the “Index” dropdown to growth benchmarks, but they do little better than the S&P 500 head-to-head with AGTHX. 

Here’s a similar graph from Morningstar:

Comparing to VIGAX

Instead of benchmarks, let’s see how AGTHX does against a growth index fund, like VIGAX by Vanguard. VIGAX has no sales load and a 0.05% expense ratio. Using the metric of “performance of a lump $10k investment”, you get a chart that looks like this:

You can see that VIGAX and AGTHX are pretty close, but AGTHX beats VIGAX by 6.6% total return.

BUT, that ignores the 5.75% sales load for AGTHX. Factor that in, and assuming the sales load isn’t applied to dividends, AGTHX outperforms VIGAX by only 0.5% over the last twenty years, or $270.54. I would expect a bigger difference than that.

401(k) Contributions Aren’t Lump Sums

Generally you don’t fund your 401(k) with a lump sum but instead make monthly contributions. What if you were contributing $1,000 every month for the past twenty years, including reinvested dividends without sales load charges on the reinvested dividend. How does that performance look?

This time AGTHX ends up with a balance of only 90.6% of VIGAX, $105,540.44 less. That sales load, hitting every contribution, really drags things down.

Sidebar: Graphs that make you go “Huh?”

As I was writing this post, I started my analysis using Yahoo! Finance’s historical data, and using the “Adjusted Closing Price”, which is supposedly adjusted for dividends, stock splits, etc. What I found is that it’s not at all reliable when looking at historical monthly data. Yahoo! Finances’ data made both VIGAX and VFIAX look far superior to AGTHX. The data was missing some dividends. Here is the Yahoo Finance chart comparison:

I suspect that Google Finance has similar issues and is probably only a NAV comparison, ignoring any reinvested dividends, giving a poor way to compare investments:

Instead of using data from Yahoo!, I ended up screen scraping historical dividend data from another website and doing my own math. There certainly could be errors in my math or in what date I chose to credit the dividend to, but it’s close enough to both the graphs from Morningstar and The Capital Group that it probably is close enough.


By evaluating a 401(k) option on investment objective, fee structure, and benchmark performance, you can understand better your 401(k) investment options. 

In analyzing AGTHX, I learned more about sales loads and their relationship to investment returns. I’ve never paid nor want to ever pay a sales load . And now I can see how detrimental they can be  on 401(k) options.

As a bonus, I also learned that Yahoo! Finance or Google Finance can’t be trusted when comparing investments.

What do you think of my analysis? Am I missing something or want to see something else? I’d love to hear in the comments.

Update 2.21.2021: For an up close view of getting pushed front-loaded American Funds by Edward Jones, read Impersonal Finances’s  post.

Hasta luego!

8 thoughts on “How to Evaluate An Investment Option using AGTHX

  1. My investment decision criteria is much simpler. Only no-load. And only zero-ish fees.

    Historical outperformance is simply an artifact of past luck. It’s not helpful going forward. The only thing that matters going forward are fees. Everything else is noise.

    In more “financey” terms, past outperformance is likely a result of beta + luck, not alpha. Even if there were backwards looking alpha, it’s very unlikely that alpha will continue going forward; particularly for a high-fee fund.

      1. The allure of beating the market is pretty strong. I can see why people obsess over it.

        It’s said that the appreciation for passive investing, as a function of one’s investing experience, is “U” shaped. At the beginning, passive investing seems appealing. Then people try to overthink it but end up getting burned. Eventually they go back to passive.

  2. To some extent, I am surprised these front end load fee funds still exist. I accidently bought one years ago when I was just getting started (VICSX – only 0.25%), but it was a very small amount and I noticed right away. It is odd that they point this to the S&P 500 for performance comparison. I generally share the professor’s view about noise/market returns, but I should probably re-look at that. My source of truth on the subject is one Vanguard study and several bloggers who are probably suffering from some form of group think. I like to think there are people out there beating the market.

    Wondering, did you point your friend to your blog? I have had several personal finance and investment topics come up at the gym lately (surely a sign of a bubble). Depending on the audience, I either give my short 2 cents or steer clear of the conversation altogether, but have thought about using the blog as “if you want to read it, its there”. My wife is currently the only one in my real life that knows I even have a blog, might be best to keep it that way.


    1. I too was surprised that they still exist. I had read about them, but this was the first time I’d actually encountered someone who actually faced one in their 401(k) plan. I thought it was a good writing foil.

      I have pointed friends, family, and even coworkers at my blog. One of the reasons I write my blog is exactly what you point out, a place for me to say “if you want to learn more, here’s a place where I wrote more about it.” Some of them appreciate it, but I really don’t know if I’ve truly impacted anyone’s financial decisions. And depending on the audience, I might not even point them here, just smiling and moving on. I don’t worry too much about my online persona making contact with my real-life persona, but I do shy away from sharing detailed information, mostly because it leads to unhealthy comparisons. Exact balances, salaries, etc., are so highly personal that beyond voyeurism, I suspect my numbers are helpful to other readers.

      Thanks for your comment.

  3. Looks like we are on a similar wavelength–I just wrote last week about American Funds load fees, which I have a personal vendetta against since that was the Edward Jones standard when I first started investing. You did a much better job of capturing the performance comparison, with charts to boot. I’m going to add a link to this in my own post–keep spreading the word about these crazy load fees!

    1. Thanks for the comment. I’ll admit that the American Funds have been mostly under my radar until my acquaintance asked me what I thought about them. I suspect that these high loads are pushed through the 401(k) plans for smaller employers who aren’t savvy enough to recognized a bad deal. I’ve been fortunate to have 401(k) plans that didn’t have fees as bad as these.

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