Hefty Returns Despite Its Size

You've got to hand it to American Funds. No other fund company has ever come close to handling an asset base as gargantuan as that of the $180-billion Growth Fund of America, let alone do so with as much grace and ease. Although you have to pay stiff sales fees to invest in GFA, this may be one fund that's worth the price of admission.

American is no stranger to managing its own girth. The company runs seven of the ten largest stock funds and has never closed a fund to new investors. Assets in American's 12 stock funds, which are run by Capital Research and Management Co., total almost $800 billion.

Bloat hasn't seemed to hinder GFA and its sister funds a bit. The 11 American stock funds that have been around for ten years or more have all beaten Standard & Poor's 500-stock index over that period. Nine rank in the top 25% of their category. From its inception in 1973, GFA (symbol AGTHX for Class A shares) has returned 15% annualized, beating the S&P 500 by an average of four percentage points per year.

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Credit Capital Research's multiple-manager approach for GFA's success. The fund's 11 portfolio managers each direct a slice of the fund's assets independently, while a group of analysts manages a 12th piece.

All of GFA's managers have the same goal-- to invest in growing companies -- but each can take a different tack to get there. Blair Frank, a manager since 2001, buys "companies that are growing their customer base, products, market share and profitability," according to American Funds literature. Donnalisa Barnum, who also joined in 2001, prefers companies with "strong research and development, ability to raise prices or cut costs, and a strong, positive corporate culture."

Although manager independence is key, Capital Research maintains strict oversight. The company's Investment Control Group monitors all workings within the fund, acting "like a traffic light" for stock transactions, says Maura Griffin, a spokeswoman for American Funds. For example, if one manager wants to sell a stock, he or she must first offer it to the other managers for their segments of the portfolio. That extra step holds down transaction costs and overall turnover.

That GFA hasn't become a closet index fund is a feat. "Even with its huge asset base, it looks significantly different than the S&P," says Morningstar analyst Greg Carlson. "And it's not heavily focused on tech and health care, like other growth funds."

There are signs that GFA's massiveness could eventually affect performance. Carlson says the fund's size "makes it difficult to invest in mid- and small-cap companies, even with the individual managers."

He also notes that some of the managers have been "buying clusters of companies" rather than picking stocks one at a time. But GFA's success is based primarily on the strength of managers' individual stock picks, rather than on sector calls.

American Funds says it has no plans to close GFA to new investors. Although performance may eventually begin to suffer under the weight of all those assets, it hasn't so far. GFA remains a sound choice for investors who work with advisers and are accustomed to paying sales charges for their funds.