The love affair financial advisers have enjoyed with American Funds has cooled.
Although advisers once made American Funds the biggest mutual fund family by long-term fund assets, driving assets to more than $1.19 trillion in October 2007, growing adviser discontent threatens to push the fund group into third place. Funds from American Funds are generally sold through advisers.
American Funds' total long-term fund assets stood at $880 billion at the end of September, placing it second behind
The Vanguard Group Inc., with $1.01 trillion and
Fidelity Investments, with $709 billion.
During the third quarter, investors yanked $5.1 billion out of American Funds, according to Morningstar Inc.
Year-to-date through September, the firm had outflows of $19.3 billion.
Meanwhile, Vanguard and Fidelity have seen inflows.
During the third quarter, Vanguard had $27.5 billion in net new flows, while Fidelity had $8.6 billion.
Year-to-date through September, Vanguard had $74.6 billion in net new flows, while Fidelity had $17.09 billion.
WHO IS WORRIED?
American Funds, which is advised by Capital Research & Management Co., however, sees no need to panic.
“Our outflows have lagged the overall industry,” said Chuck Friedhoff, a spokesman at the firm. “What we're seeing is, American Funds are retaining assets at a higher rate then the overall industry.”
That may be true, but not against Vanguard and Fidelity. Along with American Funds, the trio control more than 39% of long-term mutual fund assets.
American Funds' fund mix is at least partly to blame, said Sonya Morris, associate director of fund analysis at Morningstar.
Vanguard and Fidelity have a more diversified menu of funds, while American Funds' mutual fund lineup is significantly skewed toward equities, she said.
That hurt American as investors fled equities for the relative safety of bonds during the recession, and it continues to hurt them, Ms. Morris said.
“The overriding story, and the main factor behind American's outflows, has been investors' overwhelming preferences for bond funds,” she said.
It isn't hard to see why such a preference hurt American Funds.
The firm's taxable bond funds, which account for 9.73% of its total long-term fund assets, receive a fund family score — an asset-weighted average of a group's Morningstar ratings — of 2.3. A score below 2.5 is an indication that the firm has met with little success in that asset class.
American Funds' municipal bond funds, which account for 1.9% of its assets, receive a 2.8, according to Morningstar. A score between 2.5 and 3.5 indicates the group is about average.
Given American Funds' relative lack of focus on fixed income at a time when bonds are king, it may be difficult for advisers to continue to sell clients on American Funds, said Reuben Gregg Brewer, director of mutual fund research at Value Line Inc. of New York.
“It might be an easier sell to get customer into a [Pacific Investment Management Co. LLC] fund than try to convince them that American Funds, known for stocks, is good for bonds,” he said.
Working in American's favor, however, is the fact that advisers still hold it in high regard.
Capital Research & Management received the Most Respected Fund Company Award and the Long-Term Achievement Award in InvestmentNews' Adviser's Choice competition in September.
The results were based on an extensive online survey of nearly 800 advisers who recommend mutual funds to their clients.
Some advisers, however, said that they aren't even all that impressed with American Funds' domestic-equity-fund performance.
The firm's domestic-stock funds, which account for more than 38% of its assets, receive a fund family score of three from Morningstar, indicating that the group is about average.
American Funds has let some of its funds — most notably the $149.3 billion American Funds Growth Fund of America (AGTHX) — grow to such a size that it is difficult for them to be anything more than closet index funds, said Lou Stanasolovich, president of Legend Financial Advisors Inc. The firm has $350 million in assets under management.
“They're not doing anything to justify the cost” of investing in such funds, Mr. Stanasolovich said.
The Growth Fund of America has a relatively low expense ratio of 0.65%, not counting sales loads, but investors can do better in a low-cost index fund, he said.
The performance numbers, however, only partially back him up.
Year-to-date through Oct. 28, the fund was up 24.80%. It was up 22.05% for the one-year period, down 4.66% for the annualized three-year period, and up 2.84% for the annualized five-year period, according to Morningstar.
The S&P 500 was up 17.76% for the same year-to-date period, up 13.83% for the one-year period, down 6.82% for the annualized three-year period and up 0.50% for the annualized five-year period.
Such numbers are why some advisers think that performance alone doesn't explain why American Funds has been far less successful at stanching outflows than its chief rivals.
Some suspect that advisers have pulled back on exposure to American Funds because the group offers a relatively limited number of funds that don't offer targeted exposure to certain hot segments of the market.
“I suspect that the outflows from American really speak more to a changing adviser as opposed to changes within the funds,” said Malcolm Makin, whose practice, Professional Planning Group of Westerly, R.I., is affiliated with Raymond James Financial Services Inc. “Because of where technology is now, it is comparatively easy for an advisers to move in and out of the market.”
Other advisers — particularly fee-only advisers — suspect American Funds has had trouble stopping outflows because its mutual funds come with loads that they view as an unnecessary extra cost.
“My clients have become very, very cost-conscious in this past year,” said Katie Weigel, founder and managing director of LongPoint Financial Planning LLC, a firm with $20 million under management. “Given active management did not save them any better from last year's meltdown, they are now very keen on lowering their overall portfolio expenses.”
American Funds' offerings are “generally very good,” but because they come with loads, it isn't hard to find better funds for less money, said Ms. Weigel, who prior to launching her own firm was a vice president and senior product manager of the Russell Indexes at Russell Investment Group.
E-mail David Hoffman at [email protected].
