Wave of new offerings coming from flagging American Funds

Second-largest mutual fund family plans to unveil eight funds this spring; launched only three over the past decade

Jan 9, 2012 @ 3:39 pm

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Even as it continues to bleed assets, American Funds plans a major expansion of its mutual fund lineup for the first time in a decade.

American Funds will launch eight funds of funds in May. The funds will include tax-exempt preservation, preservation, tax-advantaged income, income, balanced, growth and income, growth and global growth strategies.

Each fund of funds will invest in existing American Funds. The American Growth Fund, for example, has the ability to invest in the American Growth Fund of America Fund (AGTHX) and the American Funds EuroPacific Growth Fund (AEPGX), among other growth funds at the firm.

“Advisors and investors have asked us to put together a series of funds that would allow them to invest in a multiple funds in a single investment,” said Chuck Freadhoff, American Funds' spokesman.

“In the past, if you wanted to invest toward an objective and have diversification, you had to buy four or five funds … these funds make it a lot easier and more convenient,” he said.

The funds of funds will be able to use the underlying funds' institutional share classes to keep expenses down, according to a prospectus filed with the Securities and Exchange Commission. The American Funds EuroPacific Growth Fund has an institutional share class expense ratio of 0.5%, 35 basis points lower than the retail share class, for example.

The prospectus, however, did not include the new funds' expected expense ratios and Mr. Freadhoff declined to comment on the funds' directly while they are in the registration process.

Rett Dean, principal at River Chase Financial Planning LLC, prefers using funds of funds for smaller accounts, such as those for a client's children, because it's an easy way to get diversification. “If an account has less than $25,000, they're superefficient,” he said.

The biggest concern Mr. Dean has about funds of funds, other than that the expenses tend to be higher than the average mutual fund's, is making sure that as the objectives of the funds, such as growth, stay in line with the investor's needs as they change. “The adviser needs to provide that oversight,” he said.

The eight offerings are being launched at a time when American Funds is seeing investors pull money out of its funds with increasing frequency. The fund family's assets topped $944 billion in 2009, with $31 billion in net outflows. Through November of last year, American Funds was down to about $863 billion in total assets, with $70 billion in outflows, according to Lipper Inc.

Part of the problem has been advisers' moving towards new strategies like alternatives and unconstrained bond funds, said Matthew Lemieux, a mutual fund analyst at Lipper. “American Funds have been in people's portfolios for a long time," he said, "and investors may have started weaning off them to look at new strategies and new fund shops."

Mr Freadhoff said the new strategies are not simply meant to be asset gatherers, but are instead a response to investor demand. He acknowledged, however, that American Funds is working on stemming the outflows. “We're trying harder than ever to communicate with advisers what we consider the strengths of the American Funds and the system to be. When you're in such a volatile market, it's hard to get people to remain focused on their objectives."

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