Here’s the deal: Take it or leave it
“Do one thing, and do it well,” the old line goes.
For L.A.-based money manager American Funds, that “one thing” for the last 80 years has been to invest in stocks worldwide with a buy-and-hold approach.
Racking up healthy returns for its investors over the decades, American Funds has quietly grown to be the second-largest U.S. fund company, with about $880 billion in long-term assets to No. 1 Vanguard Group’s $1 trillion.
And in the business of actively managed stock funds -- funds that try to beat the market in the long run rather than just track an index like the Standard & Poor’s 500 -- American manages more money than closest rivals Fidelity Investments and Vanguard combined.
But this year, the public’s appetite for American’s straightforward stock investing strategy has waned markedly. The torrent of new money that poured into the firm’s funds from 2001 through 2007 has begun to reverse: Even as stock markets worldwide have recovered dramatically since early March, many of American’s biggest funds have been suffering net outflows.
Redemptions by investors leaving American Funds outpaced new purchases by $19.3 billion overall in the first nine months of this year, according to Morningstar Inc.
That isn’t a catastrophic outflow for a company with $880 billion in assets. Still, when investors read that others are pulling cash from funds they own, they may become suspicious: What do the sellers know that they don’t?
With American’s funds, the selling may be less about what investors know than what they feel in their gut: that their tolerance for risk has changed dramatically since the financial markets’ crash last year, which slammed American’s portfolios with the rest of the industry.
That gut check may have long-term implications for a stock-focused fund shop like American. But unlike many of its rivals, the company isn’t willing to play to sudden swings in investors’ perception of markets. In a sense, American just doesn’t believe that the customer is always right.
Case in point: Many individuals have turned away from stock funds this year in favor of bond funds, an obvious response to fears that the equity market could collapse again.
Dick Ferree, a principal at financial advisor Ferree, McCarthy & Price in Santa Ana, says he began paring back some of his clients’ American Funds stock portfolios last year, shifting assets to bond funds to reduce the risk of loss.
Before the markets’ crash, it wasn’t unusual for investors to be comfortable holding 70% of their total assets in stocks. “But nobody is at 70% equities now,” Ferree said.
American offers a menu of bond funds, but their assets are dwarfed by the company’s stock-fund assets. And when investors think of bonds, they’re more likely to think of other fund brand names -- notably Pimco in Newport Beach -- that are far better known than American for managing bond assets.
The fund industry’s typical response to a surge in investor demand for a particular type of fund is to rush to create more of what people want.
American, by contrast, has always moved glacially with new products. In the last three years the company has launched just two new funds, bringing its total menu to 30 portfolios (besides its so-called target-date retirement funds).
Most other major fund firms offer two to three times that number of funds.
What’s more, American’s relatively limited menu lacks the type of specialty funds that many investors have sought over the last two years in the name of diversification.
You want a commodity or gold fund? American has none. Ditto for real-estate-oriented funds, and for exchange-traded funds that track narrow market sectors. And while some fund firms have introduced hedge-fund-like portfolios whose managers can “short” stocks -- betting on falling prices -- that concept is anathema to American Funds.
The company’s uncomplicated approach is to offer well-diversified stock funds that mostly focus on blue-chip issues in the U.S. and abroad. The top 10 holdings of the firm’s flagship Growth Fund of America, for example, include Microsoft Corp., Coca-Cola Co. and Bank of America Corp.
American is old-school in more ways than one. The firm’s parent, Capital Group Cos., is owned by its top executives and fund managers, not by outside shareholders. Its funds all are team-managed rather than individually managed. And Capital has always shunned publicity, which is why you rarely see an American Funds manager quoted in the press or doing a TV stint.
A company spokesman, Chuck Freadhoff, says the cash outflows this year haven’t surprised American and aren’t causing problems for portfolio managers. (One risk is that, if redemptions mount, managers could be forced to sell stocks they would otherwise prefer to keep.)
“We tell investors, ‘Don’t look at the cash flows, look at our results,’ ” Freadhoff said.
This year those results are a mixed bag. Growth Fund of America, up 29.8% year to date through Friday, has trounced the S&P; 500 index’s 21.9% gain. But another of American’s huge portfolios, Washington Mutual Investors, has managed just a 13.4% gain.
Still, American stresses a long-term view of the markets and says it expects its investors to have the same philosophy. That’s the key reason it doesn’t sell its funds directly to the public (other than through 401[k]-type plans), but instead has always relied on financial advisors: American expects the advisors to keep clients focused on the long haul.
That is self-serving, of course. But measured over the last 20 years, many of American’s funds have in fact delivered returns that have outpaced the market. It isn’t a fluke that the firm has mushroomed to this size.
What about the next 20 years? To stay with American Funds and its bread-and-butter market strategy, investors essentially have to make two bets: First, that stock markets worldwide aren’t headed for a calamity bigger and more sustained than what 2008 brought; and second, that American’s stock-picking will provide market-beating returns that will justify the management fees and advisor fees they pay for the privilege of owning the funds.
American’s non-flashy investment strategy has 80 years of history on its side. Its investors will have to decide if that’s enough -- because the company isn’t likely to offer them other options.
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