American Funds is fighting to take back the reins on an argument it says has moved too far in favor of passive investing.
After a year spent trimming adviser redemptions and documenting data it says
proves some active management can be good for you, the man responsible for leading the firm's growing army of wholesalers in the U.S. says the firm is ready to double-down in 2015.
“There clearly is a one-sided view or argument in the marketplace,” said Matthew O'Connor, who leads — and
has grown by more than a quarter — the firm's distribution force in North America. “If you do just the surface-level discussion, the only logical answer is passive.”
In a nod to the estimated 10,000 baby boomers who retire from the labor force each day in the U.S., Mr. O'Connor said the firm's next goal is to launch an argument for why active management matters not just as investors build wealth, but as they spend it. New research on this topic will be released later this year.
The firm's previous papers have argued that while it may be true that most active managers fail to outperform their respective benchmarks, certain funds have a better chance. In particular, those with low expenses and high investment by their portfolio managers deliver higher returns and better outcomes to investors.
That point of view may be gathering steam among advisers. Mr. O'Connor's team of 155 fund sellers helped American Funds turn its cash flows positive last year for the first time in seven years. Just last month, the team posted its best net fund sales since the financial crisis.
About $345 million moved into the firm's mutual funds last year, according to a Morningstar Inc. estimate. Another $1.9 billion flowed in last month, making it
the best month for the firm since May 2009.
But what success the
Capital Group Cos. Inc.-owned firm, which is based in Los Angeles, is enjoying is limited by what it's endured over the last several years.
As passive-tilted Vanguard Group Inc. became the undisputed leader in mutual funds, with $2.3 trillion in mutual fund assets, American Funds lost the top spot in the mutual fund business and dropped to third. American Funds, with $1.2 trillion, now sits behind Vanguard and
Fidelity Investments,
another firm grappling with the passive investing trend, in that ranking.
Where Vanguard met the movement of advisers to business models increasingly based on advisers charging fees directly to clients, in part with sales-charge-free exchange-traded funds, American Funds
didn't successfully replace the outflows in its “load” funds with sales into other products that don't pay advisers commissions. And
some advisers found themselves disappointed with the funds' performance during the financial crisis.
American Funds lost $251 billion to redemptions from 2008 to 2013. To put that in perspective, those outflows are larger than the assets today held individually in the mutual fund lineups of
BlackRock Inc. and Dimensional Fund Advisors, two brands that also have a massive constituency of financial advisers, brokers and consultants.
As American Funds looks to build momentum and win back the space in portfolios it lost in recent years, Mr. O'Connor concedes that it's fighting against an environment “very much driven, at least from a U.S. equity perspective, to passive.”
Alec Lucas, a Morningstar analyst who covers Capital Group, said the firm has demonstrated “good recent performance combined with attractive investment options, especially for those at or near retirement.”
He said over half of the firm's funds had returns ranking in the top third of their categories and about two-thirds beat their peers.
The flows reflect the increased focus on retirement-focused sales.
The firm's largest fund, the $140.5 billion Growth Fund of America (AGTHX), continues to lose assets, to the tune of $7.9 billion over the last year. But “balanced” and income-oriented funds have been among the winners — the AMCAP (AMCPX), International Growth and Income (IGAAX) and American Balanced (ABALX) strategies have brought in $8.3 billion over that same time period.
