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All Contents © 2019The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| November 21, 2018
No doubt you’ve heard of American Funds. But unless you worked through an adviser, chances are you don’t own one of their funds. That’s because until recently, you couldn’t buy American’s funds without going through an adviser, plus there was a fat commission to pay. That’s changed recently. The firm made a low-fee share class available at certain brokerage firms, including Fidelity and Schwab, for no sales commission.
None of that matters if you can invest in American’s funds in your 401(k) plan – there’s no load and no adviser is required. And you’re in luck: Many of their funds are standouts. That’s in part due to the way that Capital Group, the firm that manages the American Funds, runs its products.
The firm’s investing approach, The Capital System, is unique. Each portfolio has multiple managers, from as few as two to as many as 13. Groupthink is frowned upon. Each manager runs his or her own portion of assets independently and is free to develop his or her own investing style – within the constraints of the fund’s mandate, of course. American Funds managers also are encouraged to invest their own money in the portfolios they run. Nearly every fund has at least one manager at the wheel with more than $1 million of his or her own money in the portfolio.
We will look at some of the best American funds for your 401(k) and filter out some lesser options. This year, eight American Funds stock portfolios and one target-date fund ranked among the most popular 401(k) funds. As we did with popular retirement-plan funds from Vanguard, Fidelity and T. Rowe Price, we pick apart each American Funds portfolio on the list of the top hundred 401(k) funds and rate them either “buy,” “sell” or “hold.”
Returns and data are as of Oct. 25, 2018, unless otherwise noted. Three- and five-year returns are annualized.
Expense ratio: 0.68%
One-year return: 8.3%
Three-year return: 11.1%
Five-year return: 10.5%
Value of $10,000 invested 10 years ago: $40,322
Top three stock holdings: Netflix (NFLX), AbbVie (ABBV), Abbott Laboratories (ABT)
American Funds AMCAP invests in large, growing companies. But over the past 10 years – a bull market time for stocks, particularly shares in fast-growing firms – the fund has an average return relative to its peers.
Part of the problem is the fund goes its own way. For starters, it devotes a bigger slug of assets to midsize stocks than do its peers: funds that invest in large, growing companies. And shares in midsize firms have lately lagged their larger brethren. Holdings in AMCAP have an average market cap of $61.5 billion. By contrast, stocks in the typical large growth fund have an average market value of $161.8 billion. Tech shares are another differentiator: They account for 33% of the typical large growth fund, but they make up just 24% of AMCAP assets. Finally, the fund has a chunk of assets (11%, on average, over the past three years) sitting in cash and bonds. The typical large growth fund, on the other hand, allocates just 2% of assets to cash and bonds.
Investors looking for growth have better options. Although AMCAP’s 0.68% annual expense ratio is low relative to its peers, an investment in an Standard & Poor's 500-stock index fund would have been less volatile and more rewarding over the past three and five years.
Expense ratio: 0.57%
One-year return: 3.5%
Three-year return: 7.4%
Five-year return: 7.5%
Value of $10,000 invested 10 years ago: $28,065
Top three stock holdings: Microsoft (MSFT), UnitedHealth Group (UNH), Berkshire Hathaway (BRK.A)
Few funds have been as consistently good as American Funds Balanced over the years. In nine of the past 10 full calendar years, and so far in 2018, Balanced has outpaced its competition: funds that typically hold 60% of assets in stocks and 40% in bonds. Over the past three years, Balanced’s annualized returns rank among the top 8% of all balanced funds.
Like other portfolios from American Funds, Balanced is run by several managers, each of whom takes charge of his own slice of the fund’s assets. The principal manager, Greg Johnson, decides whether to ratchet up or down the stock side of the portfolio, depending on market conditions. Johnson and six others take care of the stock picking (one of the stock pickers also picks bonds). They favor mega-cap companies that pay dividends. Four dedicated fixed-income specialists, plus the one swing picker, choose bonds for the debt side of the portfolio. Treasuries and other government-backed IOUs make up the bulk of the portfolio’s bonds.
Although each manager runs his or her sleeve independently, the results have been good. Over the past three years, Balanced has turned in above-average results with below-average volatility. This is a fine choice for investors who want to stay in the stock market but keep volatility at bay.
Expense ratio: 0.77%
One-year return: -2.7%
Three-year return: 6.1%
Five-year return: 5.4%
Value of $10,000 invested 10 years ago: $27,469
Top three stock holdings: AbbVie, Samsung Electronics, Amgen (AMGN)
Some fund names are cryptic; others are straightforward. With American Funds Capital World Growth & Income, you get the latter. It invests in stocks all over the world with the goal of providing growth and income. Nearly 40% of the fund’s assets are in U.S. stocks; another 54% are in foreign shares (from developed and emerging nations), and the rest is in cash or bonds. The portfolio yields 2.06%.
Not every stock in the portfolio pays a dividend, though. While the fund holds a combination of steady-Eddie dividend payers, such as AbbVie, Novartis (NVS) and Prudential (PUK), it also holds zippier, fast-growing firms that don’t pay a dividend, such as Netflix, Amazon.com (AMZN) and Facebook (FB).
The two sides have generated middling returns, whether you look at it year-by-year or over a three-, five- and 10-year annualized basis. Either way, Capital World Growth & Income ranks average or below average compared with its peers, which are funds that invest in large companies all over the world. What’s more, the fund has been only slightly less volatile over the past five and 10 years, so on a risk-adjusted return basis, Growth & Income also falls short.
If you’re looking for a one-stop solution that holds U.S. and foreign stocks, this fund won’t be a total disaster. But we think you can do better by choosing stronger funds from your 401(k) plan – perhaps a standalone fund that focuses on U.S. stocks paired with a standalone international stock portfolio.
Expense ratio: 0.82%
One-year return: -10.7%
Three-year return: 3.4%
Five-year return: 2.8%
Value of $10,000 invested 10 years ago: $23,910
Top three stock holdings: AIA Group (AAGIY), Airbus (EADSY), Nintendo (NTDOY)
Capital Group, the management firm behind the many American Funds portfolios, isn’t afraid of big funds. Half of the country’s 10 largest funds, as measured by assets, are American Funds portfolios. To get around the heft, big funds are divided among multiple managers. Each one runs a slice of the fund’s assets on their own. American Funds EuroPacific Growth, with $146.6 billion in assets, has nine managers.
For investors in search of an actively managed international stock fund, EuroPacific Growth isn’t a horrible choice, but we’re not going to jump up and down about it either. Over the past 10 years, the fund ranks ahead of 42% of its peers: funds that invest in large, foreign companies. That’s above average, but only just.
Still, it’s worth noting that over the past decade, you would have done better in EuroPacific Growth, with an 9.1% annualized return, than the biggest international stock fund in the country, Vanguard Total International Stock (VGTSX), with a 8.1% return. That’s why we have a “hold” on EuroPacific Growth. Its low expense ratio (relative to other actively managed foreign stock funds) helps, too.
Expense ratio: 0.60%
One-year return: 4.2%
Three-year return: 10.8%
Five-year return: 10.1%
Value of $10,000 invested 10 years ago: $36,997
Top three stock holdings: Microsoft, Broadcom (AVGO), Amazon.com
We’re shifting down a notch with American Funds Fundamental Investors and moving our rating on the fund to “hold” from “buy.” The portfolio, which focuses on stocks in large, growing companies that pay dividends, tends to be streaky. In 2014, for instance, it lagged its typical peers, large blend funds, only to rebound and top the charts in 2015, 2016 and 2017. This year, it’s cooled considerably. The fund is flat for the first 10 months of the year, lags the S&P 500 by four percentage points and ranks behind 78% of its peers.
It’s not a “sell,” however, because the fund holds up well over the long haul. You just must be willing to weather the rough patches and invest for the long term. Over the past 15 years, the fund’s 9.9% annualized return has outpaced the S&P 500, which returned 8.9% annualized, and ranks among the top 4% of all large funds that invest in large companies with growth and value characteristics.
The fund, which Capital Group calls its “most flexible growth and income fund,” can be somewhat contrarian because it seeks primarily undervalued, overlooked and out-of-favor stocks. Nearly 30% of assets are devoted to technology stocks. And the fund holds a smattering of shares in foreign firms, too. Taiwan Semiconductor Manufacturing (TSM), the Taiwanese chipmaker, and British American Tobacco (BTI) are the fund’s top foreign stock holdings. The fund yields 1.5%.
Expense ratio: 0.62%
One-year return: 9.4%
Three-year return: 12.4%
Five-year return: 11.4%
Value of $10,000 invested 10 years ago: $38,922
Top three stock holdings: Amazon.com, Netflix, Facebook
Maybe too many cooks really do spoil the pudding. American Funds The Growth Fund of America is the biggest actively managed fund in the country, with close to $180.8 billion in assets. In keeping with the Capital Group system, the fund has 13 managers who each run their own portion of assets. They’re tasked with finding attractively valued companies with good, long-term prospects. Beyond that, the managers are free to fill in the blanks. They can even invest overseas if they want: Up to 25% of the assets can be invested in securities issued in foreign countries.
You’d think with that much brain power and flexibility, the 13 managers, who have an average of 10 years of experience with the fund between them, could deliver a winning portfolio. But they haven’t. Over the past decade, Growth Fund has had more bad years than good. It has logged average to below-average returns in six of the past 10 full calendar years compared to its peers. Fans may say we’re being harsh and point to the fact that this fund has outpaced the S&P 500 over the past three, five and 10 years. But in each time frame, Growth Fund edged the index by a slim margin.
If this is the only actively managed growth stock fund that is offered in your 401(k) plan, you could consider holding it as a counterpart to a large-company index fund. But you’d do well to see if other actively managed funds in your plan rate higher than a “hold” in our survey of 401(k) funds.
Expense ratio: 0.75%
One-year return: 1%
Three-year return: 8.5%
Five-year return: 7.9%
Value of $10,000 invested 10 years ago: $33,547
Top three stock holdings: Amazon.com, Taiwan Semiconductor Manufacturing, Facebook
The official line from Capital Group is that this fund invests in companies that stand to benefit from “changing global trade patterns.” Translation: American Funds New Perspective invests in growing, multinational companies in the U.S. and abroad.
Specifically, the fund’s managers can invest in any firm with at least $3 billion in market value anywhere in the world, as long as 25% of revenue comes from outside their home region. At last word, 52% of the fund’s assets were invested in the U.S. and 42% was in foreign countries (the rest is in cash). The U.K., Japan and France are New Perspective’s top international exposures.
This may be the best fund of the bunch in American Funds’ stable of popular 401(k) funds. Over the past 10 years, the fund’s 12.9% annualized return has topped the 9.6% gain in its benchmark, MSCI All Country World Index. It has beaten all but 12% of all-world stock funds, too.
Tech stocks, where 26% of the fund’s assets are held, figure prominently in the fund. Over the past year, the portfolio has been lifted by less popular names, such as NetApp (NTAP) and ServiceNow (NOW), in addition to well-known firms including Netflix and Amazon.com.
When the managers buy, they tend to hold. The fund’s 23% turnover ratio is less than half that of the typical world stock fund. This is a solid investment for investors who want all-in-one exposure to global stocks.
One-year return: 6.0%
Three-year return: 10.7%
Five-year return: 9.9%
Value of $10,000 invested 10 years ago: $34,410
Top three stock holdings: Microsoft, Home Depot (HD), Intel (INTC)
Of all the American Funds in this 401(k) survey, American Funds Washington Mutual is the only value-oriented strategy. And it has a quirky mandate. The fund opened in 1952 as a safe haven for investors. To lower risk, Washington Mutual creators devised a set of eligibility rules for the kinds of stocks the fund could own. The tilt is decidedly high-quality and blue-chip in nature. Capital Group summarizes Washington Mutual’s quarry as “the bluest of the blue chips.” For example, firms must have paid a dividend in eight of the previous 10 years. The fund avoids firms that earn a majority of sales from alcohol or tobacco, too.
The rules make Washington Mutual a good choice for conservative investors who want a low-volatility stock fund. AWSHX has been consistently less volatile than the S&P 500 over the past three, five and 10 years. And it currently yields 1.86%.
Over the past 12 months, Washington Mutual has outpaced its peers, funds that invest in bargain-priced, large companies thanks to strong performances in some of its biggest positions, including Boeing (BA), which climbed 43.7%, Merck (MRK), up 15.7%, and its top holding, Microsoft, which gained 40.2%.
Expense ratio: 0.74%
One-year return: 1.2%
Three-year return: 6.8%
Five-year return: 6.5%
Value of $10,000 invested 10 years ago: $29,513
Top three fund holdings: American Funds Washington Mutual, American Funds US Government Securities (AMUSX), American Funds Investment Company of America (AIVSX)
Only one Capital Group target-date fund, American Funds 2030 Target Date Retirement, appears among the top 100 most popular 401(k) funds. Like other target-date funds, this is a one-stop, set-it-and-forget-it investment solution for investors who don’t want to bother – or don’t know how – to invest their retirement savings. A pro makes all the decisions for you from the day you start saving, shifting your assets to a more conservative blend as you get closer to retirement – and in the case of American Funds Target Date Retirement, for decades after you retire, too. Indeed, your toughest decision with a target-date fund is what year to home in on (choose the fund with the target year that’s closest to the date you want to retire).
Investors in 2030 have about a dozen years to go before they retire – which puts them in their mid-fifties today. At last word, the fund held 8% in cash, 43% in U.S. stocks, 23% in foreign stocks and 26% in bonds. At retirement, in 2030, your portfolio will hold roughly 53% in cash and bonds, and the rest in stocks. Thirty years later, it will hold 60% bonds and 40% stocks.
The innards, of course, are the American Funds portfolios, including the ones mentioned in this story, such as American Balanced, The Growth Fund of America, Washington Mutual and New Perspective. It’s a bit of a mixed bag of funds, if our review of the firm’s popular 401(k) funds are any indication. But there’s no denying the results.
Relative to other target-date series, American Funds Target Date Retirement packs a punch. This 2030 fund, in particular, has outpaced its typical peer in its category in eight of the past 10 full calendar years (as well as so far in 2018). The fund’s five-year annualized return, 6.5%, ranks in the top 3% of its category; its 10-year annualized record, 11.4%, ranks among the top 6%.