investing

How to Buy American Funds Without a Sales Charge

Here are my three favorites from this terrific provider of actively managed funds.

Good news. Capital Research and Management, sponsor of the American funds—in my view, the best large shop for actively managed funds—just opened its doors for the first time to individuals who prefer to invest on their own and want to avoid sales charges. “They’ve been very good for a very long time,” says Alec Lucas, a Morningstar analyst who covers 18 American funds.

Since the American funds began operations in the early 1930s, the firm has sold its funds exclusively through investment advisers and brokers. Individual investors were turned away, and those who bought American funds through an intermediary often paid front-end sales charges of up to 5.75%.

That’s all changed. The F1 share class of all American funds is now available commission-free on the Fidelity and Schwab online brokerage sites. Presumably, American will eventually offer its funds through other discount brokerages.

This is a big deal. The American funds offer a wide lineup of good funds. What’s more, their expense ratios tend to be lower than almost any other large fund firm’s except Vanguard’s. Those low expense ratios should bring added pressure on other fund companies to lower their prices to remain competitive.

The American funds’ assets under management total $1.3 trillion, second only to Vanguard’s $2.7 trillion.

The American funds move comes as most traditional fund firms have been losing assets to Vanguard’s low-cost index and actively managed funds and, increasingly, to low-cost exchange-traded funds from Vanguard, BlackRock (sponsor of iShares ETFs) and other firms.

In contrast, more than half of the American funds’ assets are in mutual funds that charge up-front commissions. Those sales loads will likely soon be history thanks to the Labor Department’s new fiduciary rule, which will require advisers and brokers to put the interest of retirement-account clients first. The rule will make it difficult to justify buying funds that levy sales charges or high annual fees when cheaper funds are available.

Many investors have barely heard of the American funds. That’s because the funds have been targeted solely at advisers, brokers, institutional investors and other third parties, such as 401(k) plans and 529 college-savings plans. Until I became an adviser a decade ago, I never heard from the American funds. Since becoming an adviser, I hear from them all the time.

What’s to like about the American funds? Consider.

Solid long-term results. Most of the American funds boast first-rate long-term returns. The average returns of 15 American stock and hybrid (stock and bond) F1 share-class funds with records of at least five years topped the average return of the benchmark index assigned to each fund by Morningstar over the five-, 10- and 15-year periods through September 30. The average amount by which those funds outpaced their benchmarks was 0.6, 0.4 and 0.8 percentage point per year over the past five, 10 and 15 years, respectively.

The American funds, for the most part, also exhibit relatively low volatility. All of its stock funds lost substantially less than Standard & Poor’s 500-stock index in the 2007-09 bear market. Consequently, Morningstar analysts have awarded gold, silver or bronze medals—the firm’s qualitative rating for superior funds—to 22 of the 27 American funds its analysts cover.

Low expenses. Compared with other actively managed funds, the American funds are a bargain. American Funds American Mutual F1 (more on this fund below), for instance, charges 0.66% annually. That’s no bargain compared with a Vanguard index fund or most ETFs, of course. Nor compared with the 0.41% annual expense ratio for the fund’s F2 share class, which advisers can tap. But it’s a lot cheaper than the average expense ratio of 1.15% for actively managed diversified domestic stock funds.

Exceptional corporate culture. The American funds are head and shoulders above most fund firms on this qualitative measure. Most fund managers and analysts hired by the American funds stay their entire careers. Fund managers typically invest heavily in their funds—a move that tends to go hand in hand with strong returns. Like other fund firms with admirable corporate cultures, such as T. Rowe Price and Vanguard, the American funds are steady, never flashy. American rarely introduces funds to benefit from the hot investment fad du jour.

The culture is so unique that Charles Ellis, best known as a proponent of indexing, in 2004 published a book about the firm called Capital: The Story of Long-Term Investment Excellence. Capital Research and Management firm has a collaborative culture in which decisions are arrived at by consensus, no one has a title, and no one has a corner office.

The multi-manager system. Asset bloat is a huge problem for actively managed funds. As funds put up strong numbers, they tend to attract huge inflows of cash. As funds get bigger, it becomes harder for them to duplicate the results they achieved when they were relative runts. The American funds solution: Assign multiple managers to each run a slice of a fund, and base most of each manager’s pay on how that slice performs relative to a fund’s benchmark over long periods of time. The system doesn’t always work. For example, I think the firm’s biggest fund, American Funds Growth Fund of America, with assets of $144 billion, is so enormous that even splitting the portfolio among 12 managers can’t overcome bloat. But for the most part, the multi-manager approach works well.

The company is far from perfect. It’s too big to do a good job with small-capitalization stocks—indeed, American doesn’t offer any pure small-cap funds. And it hasn’t done all that well with bonds. To the firm’s credit, it recently hired several senior bond fund managers from other firms in an effort to improve its fixed-income product line.

But for large-company stocks in the U.S. and overseas, Capital Research offers some terrific funds. Below are brief descriptions of my favorites:

American Funds American Mutual F1 (symbol AMFFX) is a moderately conservative fund. Over the past 10 years through October 13, it returned an annualized 6.6%. That trailed the S%P 500 slightly, by an average of 0.2 percentage point per year.. But the fund, by investing in steady dividend payers that trade at relatively low price-earnings ratios, was 17% less volatile than the S&P 500 over that stretch. It lost 48.3% in the 2007-09 bear market—compared with a 55.3% loss for the S&P.

American Funds New Perspective F1 (NPFFX) is a perfect vehicle for investors who want to stick a toe into foreign stocks—which are cheap based on such measures as P/Es but face big economic and political headwinds. New Perspective invests in both U.S. and foreign stocks; currently, its assets are about evenly split between domestic and foreign stocks. The managers focus on growing companies, trying to buy them when they’re underpriced. Over the past 10 years, the fund returned 6.3% annualized--an average of 4.6 percentage points per year better than the MSCI All-Country World index.

American Funds New World F1 (NWFFX) is my favorite emerging-markets stock fund that is open to new investors. The fund divides its investments roughly evenly between companies domiciled in emerging markets and firms that are based in developed lands but do a lot of business in emerging nations. Managers stretch that definition to the extreme: Holdings include Alphabet, the parent of Google, and Domino’s Pizza. The fund provides a much smoother ride than pure emerging-markets offerings. The fund returned 4.5% annualized over the past 10 years.

Steve Goldberg is an investment adviser in the Washington, D.C., area.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS updated its popular online tool so that you can track the status of your second stimulus check.
January 9, 2021
Biden Calls for $1,400 Payments as Part of $1.9 Trillion Relief Package
Coronavirus and Your Money

Biden Calls for $1,400 Payments as Part of $1.9 Trillion Relief Package

Under Biden's plan for a third stimulus check, the $600 second-round stimulus checks would be increased to $2,000.
January 14, 2021
6 Reasons Why Your Second Stimulus Check Might Be Delayed
Coronavirus and Your Money

6 Reasons Why Your Second Stimulus Check Might Be Delayed

The IRS started delivering second-round payments in December. If you're still waiting for your money, here's why your second stimulus check could be l…
January 9, 2021

Recommended

The 11 Best Vanguard Funds for 2021
mutual funds

The 11 Best Vanguard Funds for 2021

It'd be easy to put together a full 2021 gameplan using nothing but a mix of the best Vanguard funds. Here are 11 that stand out for the year to come.
January 7, 2021
2021's Best Mutual Funds in 401(k) Retirement Plans
mutual funds

2021's Best Mutual Funds in 401(k) Retirement Plans

A key to smart saving for retirement: spreading your portfolio across a few of the best mutual funds in your 401(k) plan. Here, we profile the top opt…
December 29, 2020
The Best Fidelity Funds for 401(k) Retirement Savers
Investing for Income

The Best Fidelity Funds for 401(k) Retirement Savers

Fidelity funds are renowned for their managers' stock-picking prowess. We rate Fidelity's best actively managed funds that are popular in 401(k) plans…
December 28, 2020
The Best American Funds for 401(k) Retirement Savers
mutual funds

The Best American Funds for 401(k) Retirement Savers

American Funds has 14 actively managed mutual funds among the 100 most popular 401(k) offerings. We look at the Best American Funds in that group, and…
December 28, 2020