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All Contents © 2017The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| November 2017
You may not be familiar with Capital Group, but the Los Angeles–based firm runs American Funds, which has a gigantic presence in 401(k) plans. Out of the 100 largest funds in 401(k) plans, eight are American funds, according to financial consulting firm BrightScope.
At Capital Group, several managers run each fund, with up to 12 stock or bond pickers at the helm of each portfolio. The managers run slivers of the funds independently. Some may focus on high-growth stocks, for example, while others take more of a value approach.
American’s managers thoroughly research companies to find attractively priced, growing firms. They aim to hold stocks or bonds for the long term. Many managers have skin in the game, too: Nearly every fund has at least one stock or bond picker who has more than $1 million of his or her own money stashed in the portfolio.
We analyze each of these funds, rating them “buy,” “sell” or “hold.” The symbols and expense ratios are for Class F1 shares, which you can buy outside of retirement plans. The share class in your 401(k) will be different and may have lower fees. Returns and data are as of Oct. 31; three- and five-year returns are annualized.
Expense ratio: 0.75%
One-year return: 23.3%
Three-year return: 9.5%
Five-year return: 15.5%
Value of $10,000 invested 10 years ago: $21,803
Top three holdings: Netflix (NFLX), AbbVie Inc. (ABBV), Alphabet (GOOGL)
Launched in 1967, AMCAP now holds nearly $60 billion in assets, making it one of the largest stock funds in the country. The fund’s five managers focus on large growing companies (at 75% of assets), with the rest in small- and mid-cap stocks.
Long-term investors have fared exceptionally well with this fund. But if you invested in recent years, you have a right to be disappointed. AMCAP has trailed 69% of its peers over the past three years. Its five-year annualized return isn’t much better, beating just 58% of rivals in the large-growth category.
Part of AMCAP ’s problem is that it hasn’t held enough high-growth stocks. Although the portfolio includes some stars, such as Alphabet and Amazon.com (AMZN), it has been dragged down by such slower-growth firms as General Dynamics (GD), Halliburton (HAL) and Texas Instruments (TXN). These stocks help dampen the fund’s volatility. But the trade-off has been smaller rewards.
We think there are better choices for investors looking for a large-cap growth fund in a 401(k).
Expense ratio: 0.66%
One-year return: 15.2%
Three-year return: 8.0%
Five-year return: 10.8%
Value of $10,000 invested 10 years ago: $19,169
Top three stock holdings: Microsoft (MSFT), Home Depot (HD), Berkshire Hathaway (BRK.B)
A balanced fund typically holds 60% of its assets in stocks and 40% in bonds. But Balanced’s lead manager, Gregory Johnson, has wide latitude to adjust the mix, and he has used that flexibility wisely.
By the end of 2013, for instance, he had hiked the fund’s equity portion to 74%, figuring that stocks still looked cheap in the wake of the Great Recession. By early 2016, feeling more cautious, he had cut the stock allocation to 56%, though it has since edged up to 60% (the remainder is 35% in bonds and 5% in cash).
Those moves have helped Balanced beat 88% of its peers over the past decade, with a 6.7% annualized return. Pure stock funds have fared better, but they don’t have the stability of this fund. The portfolio emphasizes blue-chip dividend payers on the stock side. And its bond holdings consist largely of Treasuries, government-backed mortgage securities and high-quality corporate debt.
Buy this fund for its sturdiness and solid (if not spectacular) performance.
Expense ratio: 0.83%
One-year return: 23.2%
Three-year return: 7.4%
Five-year return: 11.2%
Value of $10,000 invested 10 years ago: $15,146
Top three holdings: AbbVie (ABBV), Samsung Electronics, Amgen (AMGN)
World stock funds aim to deliver growth by finding opportunities at home and abroad. But Capital World Growth & Income has an additional goal: to provide income.
The fund’s nine managers roam the world looking for stocks that meet both objectives. They balance high-quality stocks with generous yields—such as drug maker Novartis (NVS, yield 3.3%) and Verizon Communications (VZ, 4.9%)—with fast-growing firms such as Amazon.com (AMZN) and Netflix (NFLX), neither of which pays a dividend.
Over the past twelve months, the fund had an average yield of 2%, on par with the Standard & Poor’s 500-stock index. But its total returns—the mix of price gains and dividend income—have been mediocre. Over the past decade, the fund has gained just 4.2% a year on an annualized basis, which ranks among the top 44% of world funds. That’s nothing to dance a jig about, and it makes us lukewarm about recommending this fund.
Expense ratio: 0.87%
One-year return: 26.5%
Three-year return: 8.1%
Five-year return: 9.8%
Value of $10,000 invested 10 years ago: $13,425
Top three holdings: Samsung Electronics, Alibaba Group (BABA), HDFC Bank (HDB)
The nine stock pickers who run EuroPacific Growth have broad flexibility to go their own way. They look for large, growing companies in Europe and Asia. And any stock is fair game as long as it’s part of MSCI’s European indexes or is based in a country that borders the Pacific Ocean.
That latitude can make this fund a bit streaky, compared with foreign-market benchmarks. The fund topped the charts from 2007 through 2009. But returns have been uneven since then, beating the market averages some years and falling behind in others. So far this year, the fund’s 29.3% return is practically dead-even with the average foreign large-cap growth fund.
Nonetheless, holding this fund through its rough periods has paid off. EuroPacific’s annualized returns have beaten those of its rivals over the past five-, 10- and 15-year stretches. And the fund has done so with 1.1% to 1.2% less “standard deviation,” a measure of volatility.
One note, if you invest now: You’ll be getting exposure to Asia’s fast-growing companies. About 20% of the fund is in developing Asian markets, such as China. Those have been hot lately, fueled by Chinese internet firms such as Alibaba Group and Tencent Holdings (TCEHY), both of which the fund holds. If those markets falter, this fund could slump.
Expense ratio: 0.68%
One-year return: 25.1%
Three-year return: 12.0%
Five-year return: 15.3%
Value of $10,000 invested 10 years ago: $20,028
Top three holdings: Microsoft (MSFT), Amazon.com (AMZN), Broadcom (AVGO)
Capital Group describes Fundamental Investors as a “flexible growth and income” fund. The managers primarily look for large growth stocks. And they aren’t averse to investing for dividends if they’re backed by a business with decent sales growth that can push up the stock price, too.
Once a stock lands in Fundamental, it tends to stay. The fund’s annual turnover rate—the percentage of holdings that have changed in the past year—is just 24%, which is relatively low, according to Morningstar. Top holding Microsoft, for instance, has been in the fund since 1998.
Granted, Fundamental has been streaky. From 2011 through 2014, the fund beat the average large-blend fund in just one calendar year (2012). But since 2015, it has been on a hot pace, beating rival funds—and the S&P 500. That has pushed its three-year annualized return into the top 4% of its category.
Our advice: Ride out the fund’s rough stretches, and hold it for the long-term.
Expense ratio: 0.71%
Five-year return: 16.1%
Value of $10,000 invested 10 years ago: $20,477
Top three holdings: Amazon.com (AMZN), Alphabet (GOOGL), Broadcom (AVGO)
With nearly $170 billion in assets, Growth Fund of America is the largest actively managed stock fund in the country. Capital Group divides the fund’s assets into 12 slices, each run by its own manager. But investors are still getting a closet index fund—one that largely mirrors the returns of the S&P 500, at a much higher cost.
Growth Fund has had its share of success. In 2009, for instance, the fund’s 34.6% return beat the S&P 500 by 8.1 percentage points. And Growth Fund outpaced the S&P 500 in 2012 and 2015, albeit by slimmer margins. Those strong years helped its annualized returns stay on par with the S&P 500 over the past decade. But it hasn’t been enough to push Growth Fund past peers in the large-growth category. And Growth Fund has been more volatile, subjecting investors to steeper downturns than average.
We’re not impressed. You can get similar returns in an S&P 500 index fund, at a lower cost and with fewer bumps along the way.
Expense ratio: 0.84%
One-year return: 27.7%
Three-year return: 11.2%
Five-year return: 13.3%
Value of $10,000 invested 10 years ago: $18,243
Top three holdings: Amazon.com (AMZN), Taiwan Semiconductor Manufacturing (TSMC), Facebook (FB)
When Capital Group launched New Perspective in 1973, its objective was to invest in firms poised to benefit from shifting global trade patterns. Although the world has changed considerably since then, this global stock fund has adapted, delivering excellent returns.
Over the past 10 years, the fund’s 6.2% annualized gain crushed the 0.9% return of its benchmark, the MSCI All Country World index. New Perspective beat all but 8% of global stock funds in that time frame, too.
New Perspective’s seven managers comb the world, looking for promising growth companies with a market value of at least $5 billion. Any firm is eligible, as long as 25% of its revenues come from outside its home country or region. At last report, the managers held about half the portfolio in U.S. stocks, with the remainder in Europe (mostly in France, the Netherlands and the United Kingdom) and Asia (mainly in Japan, Singapore and Taiwan).
We like this fund’s buy-and-hold style. The portfolio’s 22% turnover ratio is less than half that of the typical world stock fund—a sign that the managers buy with conviction and hold through the downturns. Microsoft (MSFT) and Taiwan Semiconductor Manufacturing, for instance, have been in New Perspectives for more than a decade. Overall, technology stocks account for the largest slug of the fund, at 27% of its assets—well above the 18% category average.
We think this is a solid fund for investors who want exposure to U.S. and foreign stocks in one package.
Expense ratio: 0.67%
One-year return: 22.8%
Three-year return: 9.7%
Five-year return: 14.0%
Value of $10,000 invested 10 years ago: $19,522
Top three holdings: Microsoft (MSFT), Home Depot (HD), Boeing (BA)
American’s Washington Mutual fund has pulled off a rare feat. It has produced above-average returns with below-average risk. And it has done so consistently over the past three-, five-, and 10-years periods.
Launched in 1952 as a kind of safe-haven fund, Washington Mutual has long maintained strict eligibility rules for stocks to be included in the portfolio. Companies must have paid a dividend in eight out of the previous 10 years, for example. (Up to 5% of the fund’s assets can be in non-dividend payers, but those firms must pass even-stricter requirements.) In addition, the fund excludes companies that derive the majority of their revenues from alcohol or tobacco. And the fund sticks mainly with investment-grade companies that are members of the S&P 500.
Although these rules may sound difficult to follow, the managers find ways to invest opportunistically. The portfolio now holds 16.1% in technology stocks such as Intel (INTC) and Microsoft—well above large-cap value funds’ average of 11.7% in tech. The fund is also emphasizing producers of raw materials and industrial companies, and it’s largely avoiding utilities and property-owning real estate investment trusts.
The fund’s conservative style won’t prevent it from posting losses in a steep downturn. But it should lose less than the market average in that scenario, making the climb back easier when the market rebounds. For prudent, long-term investors, we think this is an excellent choice.
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