Growth Fund of America flags as U.S. standard-bearer

Growth Fund of America has lost its status as the largest U.S. equity mutual fund, a position it held for six years, as investors turn away from parent The Capital Group Cos. Inc. and its tradition of picking stocks.

The $139 billion Vanguard Total Stock Market Index Fund (VTSMX) in August overtook the $137 billion Growth Fund of America (AGTHX), whose $3.3 billion of withdrawals that month were the most of any fund, according to data from Morningstar Inc. Investors pulled $73 billion, or 8.6%, of the money held by American Funds, in the 12-month period ended Aug. 31, the heaviest proportion among the 15 biggest fund families.

“We're in an environment where stock pickers haven't been adding value, and American Funds is a case study,” mutual fund consultant Geoff Bobroff said.

For the fifth straight year, money is flowing out of mutual funds whose managers choose domestic stocks, and shareholders and financial advisers question whether it is worth paying them to try to beat the market. American Funds, which has resisted offering lower-cost index funds, has been plagued since 2008 by performance that it calls disappointing, including poor returns for the large-company stocks that are its specialty and by an investor preference for bond fund managers.

American Funds, whose redemptions have risen for the fourth year in a row, is altering its marketing while keeping its investment process intact.

COMMUNICATION EFFORTS

The firm is trying to improve communications with the advisers who sell its funds by providing more frequent reports on its outlook for the global economy and markets, said company spokesman Chuck Freadhoff.

Next year, it will start using social media such as Facebook, Twitter and YouTube to make educational material available to the public.

American Funds isn't changing its research-based process for selecting investments — or broadening its product line beyond active mutual funds, Mr. Freadhoff said.

In a December 2009 interview, James Rothenberg, Capital Group's non-executive chairman, brushed off suggestions that the firm may change the way it invests.

“I think history shows — including all the bad stuff — that we've delivered,” he said.

10-YEAR RECORDS

American Funds, which uses teams of five to 10 managers to oversee its funds, said that its stock pickers base their decisions on the same type of company-focused research that the firm has used since its founding in 1931. The funds emphasize long-term results, and by that standard, they are still outperforming the competition.

Growth Fund of America averaged annual gains of 4.5% in the 10-year period ended Sept. 16, better than 79% of rivals and beating the 3.1% annualized return of the S&P 500, its benchmark, according to Morningstar. Since it was created in 1973, the fund has bested the index for large U.S. stocks by 3 percentage points a year, according to an April regulatory filing.

American's 14 stock funds with at least a 10-year record beat 76% of rivals, on average, Morningstar data show. The firm's 11 bond funds outperformed 53% of competitors.

Some of American's funds have stumbled since the September 2008 bankruptcy of Lehman Brothers Holdings Inc. roiled markets, Mr. Freadhoff said.

Capital Group underestimated the impact that the housing collapse and resulting credit crisis would have on financial companies, he said.

Growth Fund of America dropped 39% in 2008, its biggest calendar year loss, according to data compiled by Bloomberg.

American Funds has opened three funds in the past two years, including the $440 million Global Balanced Fund, which invests in stocks and bonds around the world.

Talks on creating each began before the 2008 market decline, and none represents an attempt to halt withdrawals, Mr. Freadhoff said.

“To the extent that outflows reflect disappointment among our investors, we take them very seriously,” he said. “But we don't care that the Vanguard fund is larger than Growth Fund of America.”

Several of the firm's domestic stock funds lagged behind their benchmarks in the stock market rebound that began in 2009. In the 12-month period following March 9, 2009, when stocks reached a 12-year low, Growth Fund of America, the $55 billion Investment Company of America Fund and the $49 billion Washington Mutual Investors Fund each trailed the S&P 500's 72% gain by at least 7 percentage points.

American Funds managed assets of $887 billion as of Aug. 31, second to The Vanguard Group Inc. in U.S. mutual fund holdings, according to Morningstar. Capital Group oversaw $1.25 trillion as of June 30, including money from institutional investors such as pension funds.

Actively run domestic stock funds have seen redemptions of $290 billion since the end of 2007, Morningstar data show, while U.S. equity index funds have attracted $96 billion. An additional $160 billion has poured into exchange-traded funds that track indexes and trade throughout the day like stocks.

Investors have redeemed $31 billion from Growth Fund of America since the end of 2007, while adding $42 billion to the Vanguard fund that tracks the MSCI U.S. Broad Market Index, according to Morningstar.

Growth Fund of America charges annual fees of between 43 cents and $1.53 for every $100 invested, compared with 7 to 18 cents for the biggest Vanguard index fund, according to the company websites.

At its peak in October 2007, Growth Fund of America held $202 billion in assets. It reigned as the nation's largest equity mutual fund from May 2005 until last month, according to Morningstar.

American Funds has found it hard to live up to its past success, said mutual fund consultant Burton Greenwald. The firm performed better than most rivals during the bear market of 2000-02 and was untouched by a 2003 scandal in which competitors were accused of allowing improper late trading and market timing.

BROKER CONFIDENCE

“There was a feeling among brokers that if you sold American Funds, you never had to say you're sorry,” Mr. Greenwald said.

American Funds attracted an industry-leading $425 billion in net deposits in the six-year period ended Dec. 31, 2007, Morningstar data show. It lost $53 billion to redemptions in the first eight months of 2011, compared with $50 billion in all of last year, $20 billion in 2009 and $15 billion in 2008, Morningstar data show.

The firm's popularity earlier in the decade “may have created unrealistic expectations,” said Morningstar analyst Kevin McDevitt.

Investors' preference for bonds is benefiting firms such as Pacific Investment Management Co. LLC, Mr. Greenwald said.

“American isn't a major player in that portion of the market,” he said.

Bonds make up about 15% of American's mutual fund assets, according to the firm, compared with 27% at Vanguard and more than 90% at Pimco.

Related Topics: American Funds Distributors, Vanguard Group