American Funds raises eyebrows in launching 3 new funds
Los Angeles-based mutual fund giant American Funds took 80 years to create just 30 fund portfolios.
Now it’s launching three funds in the span of three months.
The sudden burst of activity has raised eyebrows in the investment business because it comes as American Funds continues to suffer cash outflows from its bread-and-butter stock funds, which for decades had been among the industry’s most popular with small investors.
With the public largely turning its back on U.S. stocks since 2008, American’s new funds will offer investors more of what they’ve wanted for the last two years: bonds.
This week, the company is launching a mortgage-bond portfolio and a fund that will own tax-free bonds issued by New York municipalities. The third fund, due in February, will be a global “balanced” fund that will invest in bonds and stocks worldwide.
American Funds, which has long steered clear of short-term investing fads like the dot-com stock mania of the late 1990s, says the new funds are an attempt to broaden its product lineup and not a specific response to investors’ relative loss of interest in equity funds — or their voracious appetite for bonds.
Paul Haaga Jr., chairman of Capital Research & Management Co., the sister company that manages American Funds’ $955 billion in assets, said the timing of the bond fund launches was coincidental and that the portfolios had been in development for years.
“We do it when we’re ready to do it,” he said.
Still, the funds will give American something new to sell amid tough times for its stock fund business. Since the market crash of 2008, the company’s specialty — long-term investing in shares of big-name multinational firms that American believes are bargains — has become the least-popular mutual fund strategy with individual investors, according to research firm Morningstar Inc. in Chicago.
American Funds’ stock focus is “the worst place possible in terms of investor sentiment now,” said Kevin McDevitt, who tracks the company for Morningstar.
Instead, many investors buying stock funds have turned to low-cost “index” funds such as those sold by Vanguard Group. Index portfolios simply seek to replicate the performance of market indexes, as opposed to American Funds’ approach of trying to pick stocks to beat the market.
What’s more, millions of small investors have turned against stocks altogether since the crash and have shifted their savings to bonds in the hope of earning steadier returns with lower risk of principal loss.
Although American Funds has a long history managing bonds as well as stocks, its $185 billion in fixed-income assets are dwarfed by the $770 billion in its stock funds.
As a growing number of investors have pulled money from American’s equity funds, the company suffered a net cash outflow of nearly $39 billion in the first 10 months of this year, or about 4% of assets, up from $25.3 billion in all of 2009.
By contrast, Newport Beach-based Pimco, which specializes in bond funds, had a net cash inflow of $66.5 billion in the first 10 months, lifting its total fund assets to $429 billion.
In part, American Funds and its parent firm, privately held Capital Group Cos., have been victims of their own success in the last decade.
Historically, one of American Funds’ drawing cards for investors was its conservative investment style. The company’s huge stock funds, including Washington Mutual Investors and Investment Co. of America, had reputations for holding up better than the broad market in downturns.
In 2002, for example, Washington Mutual Investors lost 14.8%, compared with a 22.1% drop in the Standard & Poor’s 500 index.
The company’s relatively modest losses in many of its funds in the 2000-02 bear market helped boost the portfolios’ appeal with professional investment advisors. American Funds has always used advisors to market its funds to the public; the company doesn’t sell its funds directly to investors, except through 401(k) retirement accounts.
From 2004 through 2007, American Funds’ net cash inflows topped $73 billion a year, as investors reeling from tech-stock losses sought safer equity ideas.
“They took in money that was maybe three to four times greater than anybody else on the equity side,” said Geoff Bobroff, head of fund research firm Bobroff Consulting.
But when the 2008 crash hit, American’s funds were slammed with the rest of the market. Some of its most popular stock funds dropped more than 30% that year — and some stunned investors fled.
Haaga acknowledges that the company should have done a better job from 2002 to 2007 of managing what were “unreasonable expectations” for the funds. He also concedes that the company’s investment performance in 2008 wasn’t up to the firm’s standards.
“We should have done better, and advisors and shareholders are judging us,” he said of the recent cash outflows.
Funds that face heavy redemptions can be at a disadvantage if managers are forced to sell favored securities. But Haaga said the outflows were “a dribble” compared with American’s total asset base.
Even so, the firm faces the ongoing challenge of trying to hold on to longtime shareholders and lure back advisors who have stopped using American Funds.
One of those advisors is Emerson Fersch, who manages $80 million at Capital Investment Advisers in Long Beach. “I place very little new money with them anymore,” Fersch said. Instead, he said he has been favoring funds that are “more flexible in what they do,” as opposed to American Funds’ primary focus on big-name stocks.
One hurdle American may face with its new bond funds is that, in a crowded field of fixed-income portfolios, none of its 13 existing bond portfolios has a coveted four- or five-star performance rating from Morningstar. They all have either two or three stars.
Also, the company’s flagship bond portfolio, the $40-billion Bond Fund of America, has struggled in recent years. The fund gained 3.8% a year over the last five years, trailing 75% of its industry peers.
Haaga said American wouldn’t veer from its strategy of patient investing for the long haul and was trying to keep its investors focused on that concept.
