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All Contents © 2017The Kiplinger Washington Editors
We don’t often write about the American Funds at Kiplinger, but that’s not because they’re poor performers. Actually, the family has several good funds. The problem: Its funds typically charge a commission when sold to individual investors, and as a rule, we don’t recommend load funds because of the added cost. As Burton Malkiel, author of A Random Walk Down Wall Street, once said, “The lower the fee, the more there is left for me.”
Many of American Funds’ portfolios are solid choices, and if they are offered in your 401(k) plan, you won’t have to pay the load to buy shares. So, in the fourth in a series looking at the most popular funds in the 401(k) market, we examine seven American Funds offerings that rank among the 101 largest mutual funds in employer-sponsored retirement plans. We've also written about the most popular funds at Fidelity, T. Rowe Price and Vanguard.
But first, Capital Group, the firm that manages the American Funds, needs some introduction...
By Nellie S. Huang, Senior Associate Editor
| From Kiplinger's Personal Finance, December 2015
Funds are listed in order of their retirement-plan assets, starting with the fund with the most assets, based on data from BrightScope, a consulting firm that rates and ranks retirement plans. Although your plan may offer these funds’ institutional share class, all data, including symbols, listed below refer to the share class that’s most accessible to the average investor, which in this case is the Class A shares. All returns are as of September 30.
The 84-year-old company, which is based in Los Angeles but has offices around the world, has its own particular way of managing funds. The firm even trademarked a name for it: the Capital System.
It starts with multiple managers—from as few as two to as many as 12—running each fund. A well-crafted management team, says David Polak, a Capital Group executive who works closely with portfolio managers at American Funds, “can smooth out returns without diminishing them.” The atmosphere is collegial, but groupthink is frowned upon. Each manager runs his or her own slice of a fund’s assets individually. Another hallmark of American funds: Managers are encouraged to invest in the funds they run, and most do. According to Capital Group, 97% of its funds have at least one manager who has more than $1 million of his or her own money invested in the portfolio.
The managers combine deep company research with a long-term, buy-and-hold philosophy. The funds typically have low turnover—and that’s true of their holdings and their managers. The average tenure of managers at the seven American funds we analyzed ranges from eight to 12 years.
The Capital System has helped build the American Funds family into a $1.2 trillion colossus. Some of the firm’s top 401(k) funds are among the largest actively managed funds in the country. And the process has produced good results: None of the American funds on our list is a dud, though some have delivered mediocre results of late. Let's meet them. . .
Symbol: AEPGXAssets: $124 billion
Expense ratio: 0.83%
1-year return: -5.2%
5-year return: 4.2%
10-year return: 5.0%
EuroPacific Growth, which opened in 1984, is one of the oldest and largest foreign-stock funds in the country. In recent years, the fund has delivered steady but decidedly average returns relative to its peers.
The fund’s girth—it holds $124 billion in assets—may have something to do with the uninspiring results, and that’s why we rate it a “hold.” Compared with its rivals, EuroPacific’s 10-year record is impressive: Its 5.0% annualized return beat the typical large-company foreign stock fund by an average of 1.1 percentage points per year. However, its relative five-year record is just middle of the pack. That said, the fund was less volatile than most of its competitors over that stretch.
EuroPacific Growth invests mostly in firms based in developed foreign countries—72% of assets at last report. Emerging markets account for the rest. Geographically, the fund’s assets are almost evenly divided between Europe and the Asia Pacific region (including Australia).
Assets: $141 billion
Expense ratio: 0.66%
1-year return: 0.4%
5-year return: 12.6%
10-year return: 6.9%
With $141 billion in assets, GFA is the largest actively managed fund in the land. Because of the fund’s immensity and its checkered performance in recent years, we rate it a “sell.” Although GFA ranks in the top 30% of all large-company growth stock funds over the past three years, the fund has been in the bottom 40% of its category in four calendar years since 2007 and in the middle twice.
The 11 managers and 25 analysts who run the 42-year-old fund have a broad view of what qualifies as a growth company. For instance, some of the fund’s 283 stocks are companies that are turning around. Others are out-of-favor firms, and still others are classic growth businesses with the potential to generate rising earnings and revenue. And despite the “of America” part of its name, the fund recently had 14% of its assets invested abroad, mostly in China, Japan and Canada. Its top three holdings: Amazon.com, Google and Gilead Sciences.
Assets: $79 billion
Expense ratio: 0.59%
1-year return: -0.1%
5-year return: 10.1%
10-year return: 6.5%
American Balanced is a reliable performer. Its five-year return ranks among the top 3% of all moderate-allocation funds (the Morningstar category that includes balanced funds, which hold roughly 60% of assets in stocks and 40% in bonds). And the fund’s performance has been steady in recent years. Over the past decade, American Balanced ranked among the top 8% of its peers, with a 6.5% annualized return—an average of 1.4 percentage points per year better than the typical balanced fund.
American Balanced’s primary goal is to preserve capital. Providing income is second, and long-term growth is third. “The idea is to provide a package for a prudent investor,” says Capital Group’s Polak. The fund must invest at least 50% of its assets in stocks and must hold at least 25% in bonds. At last word, stocks accounted for 62% of assets; bonds, 32%; and cash, 6%. Over the past 10 years, the fund’s stock exposure has been as low as 60% and as high as 74%, says Polak. Its top three stock holdings: Microsoft, Philip Morris
International and Comcast.
Assets: $68 billion
Expense ratio: 0.61%
1-year return: -1.6%
5-year return: 11.7%
10-year return: 7.2%
A decade ago, Fundamental Investors was sizzling. For three consecutive years—2005, 2006 and 2007—the fund landed in the top 7% of its category (large-company funds that invest in stocks with a blend of growth and value attributes). But aside from that streak, the fund’s returns have been subpar. Since the start of 2008, the fund has earned 4.9% annualized, trailing Standard &Poor’s 500-stock index by an average of 0.9 percentage point per year.
Polak describes the stock-picking approach of Fundamental’s managers as “fairly contrarian.” The fund’s seven managers and 40 analysts favor undervalued blue-chip stocks in out-of-favor industries. It’s the kind of strategy that requires patience, but over time it can pay off handsomely. Once a stock lands in Fundamental, it tends to stay for a while. The fund’s turnover ratio of 29% implies an average holding period of almost 3.5 years (compared with 1.6 years for the average large-company stock fund). The fund’s biggest holdings are Microsoft, Amazon.com and Philip Morris International.
Assets: $69 billion
Expense ratio: 0.58%
1-year return: -3.8%
5-year return: 12.3%
10-year return: 6.3%
When American launched Washington Mutual in 1952, it wanted to appeal to investors looking for a safe haven. To lower risk, Washington Mutual’s creators devised a strict set of eligibility rules for the kinds of stocks the fund could own. Those rules—combined with the fund’s income-first, growth-second objectives—make Washington Mutual ideal for conservative investors who want a low-volatility stock fund.
The fund’s seven current managers continue to follow the rules set out more than a half-century ago. Many of the rules target characteristics that are common among blue-chip stocks. For starters, the company must have paid a dividend in eight out of the previous 10 years. (Up to 5% of the fund’s assets can be in non-dividend payers, but they must pass even stricter requirements.) In addition, companies cannot derive the majority of their revenues from alcohol or tobacco. The rules, says Polak, represent “a very strict interpretation of ‘quality.’ ”
As you may guess, not many firms meet the standards. At last word, Washington Mutual Investors held 140 stocks, with Microsoft, Home Depot and Wells Fargo occupying the three top spots in the portfolio. The cautious strategy helps to smooth out the bumps. Over the past 10 years, Washington Mutual has been 13% less jumpy than most large-company stock funds. That helped a bit during the disastrous downturn of 2008; although the typical large-company stock fund plunged 37.1%, Washington Mutual Investors dropped 33.1%.
Assets: $56 billion
Expense ratio: 0.76%
1-year return: 0.3%
5-year return: 9.4%
10-year return: 7.3%
In 1973, consumer inflation in the U.S. hovered above 6%, Billie Jean King defeated Bobby Riggs in a tennis match billed as the “battle of the sexes,” and The Exorcist was one of Hollywood’s biggest hits. That year, Capital Group launched New Perspective, a fund designed to invest in firms poised to benefit from “changing global trading patterns,” as the current annual report puts it. It sounds quaint. After all, most large companies today—and even many small ones—operate all over the world.
But change has served this fund well. Its 10-year annualized return ranks among the top 5% of all global stock funds (those that can invest anywhere in the world).
New Perspective’s eight managers focus on growing companies based anywhere and conducting business all over the world. The fund recently had 49% of its assets in U.S. stocks and 43% in foreign issues, with the rest in cash and short-term corporate bonds. Its top three holdings are Novo Nordisk, a Danish drug company with a commanding share of diabetes treatments worldwide; Amazon.com; and Regeneron Pharmaceuticals, a Tarrytown, N.Y., biotech firm.
Assets: $80 billion
Expense ratio: 0.77%
1-year return: -6.0%
5-year return: 7.2%
10-year return: 5.9%
Most global stock funds gun for growth. But as its name suggests, Capital World has an additional goal: to generate income.
So its nine managers and 40 analysts roam the world looking for stocks that meet both objectives. The result is a barbell-like portfolio. On one side are high-quality stocks that boast high dividend yields, such as phone giant Verizon Communications and tobacco titan Altria Group. On the other side are faster-growing firms, such as biotech luminaries Amgen and Gilead Sciences.
The fund’s long-term record is strong, but its recent performance has been kind of blah. Over the past five years, Capital World Growth and Income has been a middling performer, with an annualized return of 7.2%. That’s why we rate the fund only a “hold.”
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