Cash Still Pouring In to American Funds

Regulators’ probes into certain practices of the American Funds group seem to have done little to dim the appeal of its portfolios with investors.

The company’s funds had a total net cash inflow of $66.5 billion in the first 10 months of this year, according to fund tracker Financial Research Corp. That was down 10% from the same period of 2004, but still dwarfed what other fund firms took in. Vanguard Group was No. 2, with $36.9 billion in net inflows.

For many of American Funds’ long-time investors, the bigger question has been whether the cash avalanche into the funds since 2002 could hurt their performance. Huge cash inflows can be a curse if the money comes in faster than a portfolio manager can intelligently put it to work.

American Funds’ biggest portfolio -- the $124-billion-asset Growth Fund of America, which also is the nation’s largest fund -- has mocked those worries this year. The fund is up 14.2% since Jan. 1, compared with a 7.8% gain for the average large-capitalization growth stock fund, according to Morningstar Inc.

The company’s largest foreign-stock fund, EuroPacific Growth, is up 18.1% this year, compared with 14.8% for the average international fund.

American Funds has long operated under a multiple-manager system for each fund. Growth Fund, for example, has nine managers. Each takes a slice of the pie and invests it as he or she sees fit. As a fund grows, the company can add managers and reslice the pie.

“If ever a system was devised to let a fund grow huge, this probably is it,” said Giles Almond, a Charlotte, N.C., financial advisor who uses the funds.

Still, performance of some of the funds has slipped since 2002. Washington Mutual Investors, a value-oriented fund, lags behind the average large-cap value fund this year and over the last three. But Richard Ferree, a Santa Ana financial planner, said overall returns were just one aspect of American Funds’ appeal. Many clients also are attracted by the funds’ low management fees and by an emphasis on limiting losses in down markets, he said.

American Funds shares mostly are sold via financial planners and brokers; the company says it believes most investors need continuing financial advice. Those advisors can earn a commission of as much as 5.75% on new investments.

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America’s big 10

Here are the 10 largest stock and bond funds in the American Funds stable, including year-to-date performance data and returns over the last three years:

*--* 3-year avg. Assets YTD annualized Fund (billions) return return Growth Fund of America $123.8 14.2% 18.5% Investment Co. of America 78.8 6.8 13.9 Washington Mutual Investors 76.9 4.2 13.0 EuroPacific Growth 66.6 18.1 23.8 Income Fund of America 61.5 3.0 13.9 Capital Income Builder 56.7 3.9 15.1 American Balanced 51.8 3.4 11.6 Capital World Growth & Income 51.2 12.9 23.7 New Perspective 43.2 9.9 19.8 Fundamental Investors 27.3 11.8 19.1 Vanguard 500 index fund 5.6 14.1 Average large-cap growth stock fund 7.8 13.5 Average large-cap value stock fund 6.2 15.5 Average foreign stock fund 14.8 23.8

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All returns are for Class A shares.

Sources: Times research, Bloomberg News, Morningstar Inc.