Advisers remain loyal to American Funds through ups and downs

Unshakable fealty of financial advisers is starting to pay off for American Funds

Aug 9, 2015 @ 12:01 am

By Trevor Hunnicutt

Financial adviser Frank Congemi has no doubt about the benefits of active management. He's just as certain when it comes to his manager of choice, American Funds. Mr. Congemi, a broker registered with Securities America Inc., is allocating all of his clients' money to that one firm.

“I've done away with a majority of the firms I used to do business with,” Mr. Congemi said. “I don't care if people call me an American Funds salesperson.”

While that level of dedication is unusual, the unshakable fealty of financial advisers is starting to pay off for American Funds. After historic sales declines since the financial crisis, net sales at the third-largest mutual fund brand in the world — behind Fidelity and Vanguard — turned positive last year for the first time since 2007. Those trends have continued each month this year through June, according to Morningstar Inc. estimates.

“From a momentum standpoint we have absolutely made a critical turn, particularly if you take this story all the way back to 2008-09,” said Matthew P. O'Connor, director of North American distribution for American Funds.

From 2008 through 2013, the company suffered $251 billion in redemptions, a level that's more than all the U.S. assets in mutual funds sold by BlackRock Inc. Last year, investors put $332 million back into American Funds and with $9.3 billion added this year through June 30, the company is likely to beat last year's take.

“It makes sense that American Funds are becoming more popular once again right now because we're in a mature bull market and they concentrate their portfolios on large, well-known growth stocks,” said Dieter T. Scherer Jr., an adviser at Adaptive Wealth Solutions. “It's a strategy that allows managers to better accumulate assets during a bull market, but it backfires for investors when the bear finally comes, hence many investors were discontented with American Funds when the financial crisis hit.”

CHANGES

The death last month of its parent company's chairman, James F. Rothenberg, at 69, from a heart attack, marks a change of guard for a firm whose hallmark is horn-rimmed conservatism. Yet Mr. Rothenberg, a former portfolio manager, was already helping the firm find a new voice and a fresh strategy for an era in which investors clamor for lower-cost investments.

Even for a business that lives and dies by market cycles yet always seems to come back stronger, the fund industry's titans have been shaken by the latest wave of interest in passive investing. Marketers in many cases have turned from saying there's no reason to use index funds to saying there's still a reason to sell actively managed funds.

American Funds has come out swinging. For several years, the firm has been building a case, through white papers and wholesalers, that the way its managers run money can and does beat the market.

The company measured its funds' one-, three-, five-, 10-, 20- and 30-year performance over each month between 1934 and 2013. In most cases, those funds beat their benchmark indexes, the firm said, including 97% over 30 years. Those numbers couldn't be verified, but today, the company's average fund is ahead of most of its Morningstar-selected peers over three, five, 10 and 15 years.

Despite their clear stake in winning this argument, they make for an unlikely messenger. Capital Group Cos. Inc., the American Funds parent, is notoriously camera shy, even haughty. The firm doesn't typically sell directly to consumers, and doesn't plaster metro stations or football playoff games with advertisements. Its team-first approach to money management doesn't lend itself to elevating household-name managers, and company officials don't seem to care. The product lineup rarely changes.

Nonetheless, it's built an impressive franchise as an early pioneer in emerging-markets investing, the architect of a wealth management business it increasingly emphasizes, and a money manager for institutional investors such as pension funds and endowments.

Perhaps most importantly, it's got a best friend in financial advisers. Even with outflows, American Funds has maintained top-five brand favorability ratings since the financial crisis, according to Phoenix Marketing International, a market research firm.

“In today's environment, it is absolutely critical for us to have an effective engagement with advisers,” said Mr. O'Connor, whose sales staff has ballooned in size. “We need to understand their business and their business model, their platform; we need to understand how they think.”

Capital Group was founded in 1931 by Jonathan Bell Lovelace in the depths of the Great Depression, but it was another market downturn that cemented much of the adviser loyalty that remains today.

During the go-go days of the 1990s' technology boom, the firm's top funds trailed many of its star competitors, such as Fidelity Investments' William Danoff. The firm spent most of that decade lagging the sales leaders, a group that included Fidelity, the Vanguard Group Inc., Putnam Investments and Janus Capital Group Inc.

But as the boom turned to bust, it was American Funds that looked smart. Starting in 1998, the American Funds Growth Fund of America (AGTHX) would trounce more than four-fifths of its competitors for the next nine years. Victories like that helped the firm hit its stride. From 2002 to 2007, American Funds had an unchallenged six-year reign as the top U.S. seller of mutual funds. Those sales boosted the firm to become the largest mutual fund company, with over $1 trillion at its peak.

Then, 2008 happened.

DOUBLE-DIGIT LOSSES

“2008 was across-the-board difficult,” Mr. O'Connor said. “While, frankly, we did well from a relative perspective against appropriate benchmarks, nobody focuses on a benchmark when absolute returns are down double digits.”

And some of the firms' top funds posted middling results even as the markets rebounded. Investor fled in droves. This crisis was different: Instead of building the firm's reputation, it shook it.

The company hasn't come close to regaining its position as a top seller. By sales, it ranked 139th last year among U.S. mutual fund and ETF brands, according to Morningstar. Index fund behemoth Vanguard, on the other hand, has posted net inflows each year since the financial crisis. And it claims its $214.5 billion haul last year set an industry record.

In a 2011 interview, the top executive for the American Funds' sales unit, Kevin Clifford, said advisers had been “foolish” to sell the funds as “able to defy gravity.”

Despite its fall, American Funds remains the largest mutual fund brand without ETFs. Securities regulators in March approved American Funds' ability to offer ETFs, but Mr. O'Connor said the topic “isn't something that we've spent much time on.” He said the funds aren't at all necessary to make the firm competitive with advisers.

Whatever it attempts, Capital Group's vision will have to be carried out by a reconstituted inner circle made up of Tim Armour, who has taken over as chairman, and others, such as Rob Lovelace, president of Capital Research and Management Co., the unit that manages American Funds and $1.4 trillion in assets.

“Active management has been pushed out to the edge of portfolios and passive has become the core, but active management has to come back to the core,” Mr. Lovelace, a grandson of Capital's founder, said on a panel at a Morningstar conference in June. “If you use passive funds, you get 100% of the downside.”

For Mr. Congemi, the appeal of American Funds is based on its consistent performance, low cost and focus on selling mainly through advisers and professional investors who may restrain investors' worst impulses.

“They don't surprise you in a bad way; they surprise you in a good way,” he said.

While advisers may be receptive, they're not an uncritical voting bloc.

“I would see [American Funds] as a behemoth whose funds are pretty vanilla — they're going to follow their style box,” said Jason Van Duyn, founder of AQuest Wealth Strategies. “When the market is right up, people look at indexes and say, why do I need active management?”

Wesley D. Bigler, chief executive of Longview Wealth Management, said his firm uses a 13-criterion test for funds. That means a fund needs to compete on merit, not just on brand. But the brand doesn't hurt.

“They're kind of like Coca Cola,” said Mr. Bigler, whose firm manages $422 million. “You know exactly what you're going to get. When you buy a Coke, it fizzes. It tastes right.”

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