In 'hell freezes over' moment, American Funds pairs up with passive ETFs

A year after migrating into the ETF space, Capital Group, the $2 trillion asset management complex best known for actively managed mutual funds, is branching out again by partnering with providers of passive index funds through its suite of 12 new model portfolios.

Launched earlier this month, the suite of active-passive models pairs actively managed American Funds mutual funds with passive exchange-traded funds from Schwab, Vanguard and BlackRock.

The models, which will be available soon through the Fidelity, Envestnet, and Orion platforms, represent another move toward modern reality for the 90-year-old asset manager.

“There are people who would have said hell will freeze over before Capital Group would put any passive strategies in a portfolio,” said Elisabeth Kashner, director of global fund analytics at FactSet Research Systems.

Thanks to its faithful following among financial advisors, Capital Group’s move into the ETF space has been described as a success, but the latest partnership with passive ETFs could be the start of a broader evolution for the American Funds product lineup.

“Capital Group was not immune to outflows” from its mutual funds, Kashner said. “Even though they have a very loyal base, especially in the retirement space, they realized they have to modernize.”

Kris Spazafumo, head of portfolio solutions and services at Capital Group, made it clear that financial advisors shouldn’t misinterpret the launch of the new active-passive models as a step toward an American Funds passive product.

“We remain an active manager with a 90-year history of doing that, and we are committed to being an active manager,” she said. “And as a leader in the model portfolio space, we’re aiming to offer additional choice to advisors.”

The new set of model portfolios joins an existing lineup of 19 models that are made up exclusively of American Funds strategies.

The original model portfolios, launched in 2010, have been used by approximately 38,000 financial advisors, and 15 of the 19 models were recently upgraded to a gold rating by Morningstar.

An area of strategic focus for the firm, Capital Group’s model portfolios business has more than tripled in assets under management since 2018.

“We realize many advisors, about 90%, are combining active and passive into client portfolios,” Spazafumo said. “We felt it was an opportune time to expand.”

The active-passive models, which run the gamut from global growth to preservation, will be made up of a mix of about a dozen mutual funds and ETFs, with approximately 70% of the allocation going into American Funds mutual funds.

Todd Rosenbluth, director of research at VettaFi, recognizes the logic behind Capital Group’s new strategy.

“Advisors are increasingly using active and passive funds together in one portfolio rather than choosing one side or the other,” he said. “The benefits of working with an asset manager include their expertise in portfolio construction and ease of use. While Capital Group’s new active ETFs have gained traction in their first year, they are not available yet on all brokerage platforms.”