American Funds is one of the largest mutual fund families in the United States, with over $1.7 trillion in assets under management as of 2021. The company was founded in Los Angeles in 1931 by Jonathan Bell Lovelace.
American Funds is known for its active management style and focus on long-term growth through stock investments. The company offers over 40 mutual funds across a range of categories including equity, fixed income, target date, and multi-asset. Some of American Funds’ most well-known offerings are The Growth Fund of America, The Investment Company of America, and the American Funds 2050 Target Date Retirement Fund.
The company has historically focused on selling its funds directly to investors through financial advisors rather than relying on third party distributors. American Funds also tends to have lower turnover in its portfolio holdings compared to other actively managed funds. This long-term buy and hold approach is a key aspect of the company’s investment philosophy.
Overall, American Funds aims to provide diversified mutual fund products that focus on shareholder value, collaboration between fund managers, and careful security selection based on fundamental research. The company has built a reputation for consistent long-term performance across its fund offerings.
American Funds Group relies heavily on active fund management with a focus on long-term results over short-term gains. Their portfolio managers actively pick stocks and bonds based on intensive research, instead of just tracking market indexes.
The fund family believes skilled active managers can outperform the broader market over 10-20 year periods. Their philosophy is to invest with a long investment horizon and low portfolio turnover.
Managers extensively research companies, meeting with management teams and evaluating financials. They look for quality companies with strong fundamentals poised for long-term growth. Portfolio managers have latitude to take concentrated positions in their highest conviction ideas.
Many American Funds have decades of history demonstrating the success of their active approach over long periods of time. The investment philosophy relies on patience from investors as well, allowing fund managers flexibility to ride out periods of underperformance relative to benchmarks in pursuit of market-beating returns over the long run.
American Funds manages several popular mutual funds that have attracted significant investment from individual and institutional investors. Some of their most well-known offerings are:
The Growth Fund of America
The Growth Fund of America (GFAOX) is one of the largest mutual funds in the world with over $160 billion in assets under management as of 2022. This fund focuses on investing in common stocks of companies that demonstrate strong earnings and growth potential. It takes a growth-oriented strategy, investing across market capitalizations but with a focus on large-cap U.S. stocks.
The Growth Fund of America has several managers that pick stocks based on a strategy of buying quality growth companies and holding them long-term. Some of the fund’s top holdings include Microsoft, Alphabet, Amazon, and UnitedHealth Group.
This fund has delivered strong long-term performance but has seen more volatility in recent years. It could suit investors looking for broad exposure to the U.S. stock market with a growth tilt.
The Investment Company of America
The Investment Company of America (AIVSX) is one of American Funds’ oldest and largest actively managed equity funds with over $100 billion in net assets. This fund invests in common stocks across all market capitalizations, styles, and industries.
The Investment Company of America is managed using a relative value approach, evaluating potential investments against alternatives to construct a diversified portfolio. Top holdings cover various sectors like technology, communication services, healthcare, and more.
This fund could appeal to investors seeking a core U.S. stock investment that is actively managed and diversified across sectors and market caps. It has delivered relatively strong long-term returns with moderate risk levels.
American Balanced Fund
The American Balanced Fund (ABALX) provides a mix of stocks and bonds in an allocation that typically ranges between 50-75% in equities. This fund combines growth and income objectives, investing in a wide range of companies along with government, corporate, and mortgage-backed bonds.
With over $40 billion in assets, the American Balanced Fund delivers steady returns with lower volatility than pure stock funds. Its diversified asset allocation aims to provide balance through various market cycles. This can make it a solid foundation for an overall investment portfolio.
The equity and fixed income portions are actively managed by multiple managers that collaborate to shape the fund’s overall asset allocation. American Balanced Fund has consistently ranked near the top of its category for long-term performance.
The American Funds Group offers a wide range of funds across different categories and objectives. When evaluating performance, it’s important to compare returns over various time horizons and benchmark against appropriate indexes.
Over a 1-year period ending December 31, 2022, The Growth Fund of America returned -XX.X% compared to a return of -XX.X% for the S&P 500 index. The fund aims to provide long-term growth through investing in common stocks, so periods of 5 or 10 years are more indicative of performance.
Looking at 5-year returns, The Growth Fund of America delivered an average annual return of XX.X%, underperforming the S&P 500’s XX.X% return. Over a 10-year period, the fund returned an average of XX.X% annually, again lagging the S&P 500’s 10-year average return of XX.X%.
While The Growth Fund of America has posted positive absolute returns over longer time horizons, it has failed to match or beat the broader market as measured by the S&P 500 index. This indicates room for improvement in the fund’s stock selection strategy or sector allocation decisions compared to a basic index approach.
Evaluating returns over various periods and comparing to appropriate benchmarks helps provide a complete picture of The American Funds Group’s overall fund performance. This analysis demonstrates that while the funds offer positive returns in many cases, they do not consistently outperform index alternatives. Investors should weigh this factor along with fees, diversification, and other considerations when deciding if American Funds fit their investment needs and goals.
Fees & Expenses
American Funds is known for having higher than average expense ratios compared to other mutual fund families. This is due to the active management approach taken by American Funds.
The expense ratio represents the annual fee charged to investors to cover the costs of operating and managing the fund. American Funds tend to have expense ratios ranging from 0.5% to 1%, with an average of around 0.75%. This is higher than the industry average of closer to 0.5%.
A major component of the expense ratio for American Funds is the 12b-1 fee. This fee covers the costs of marketing and distribution. American Funds typically have 12b-1 fees of 0.25% or higher. Many other fund companies do not charge 12b-1 fees at all.
In addition to expense ratios, American Funds also charge sales loads on certain share classes. This is a commission paid to a broker when shares are purchased. Sales loads can be as high as 5.75% for American Funds A shares. However, many of their funds offer load-waived share classes to avoid this upfront cost.
The higher fees charged by American Funds have been a source of criticism over the years. Investors are essentially paying more for the active management provided by American Funds portfolio managers. The company argues their expertise and security selection merits the higher costs. But passive index funds can offer much lower expenses while still providing market returns.
The tax efficiency of American Fund Group’s offerings can be an important consideration for investors. Two key factors that impact tax efficiency are turnover rate and capital gains distributions.
Turnover rate refers to how frequently a fund manager buys and sells the underlying securities within a fund’s portfolio. The higher the turnover rate, the higher the likelihood of capital gains being realized, which can lead to larger tax bills for investors. American Fund Group tends to have lower than average turnover rates compared to the broader mutual fund universe. Many of their funds have turnover rates under 30-40%, whereas the industry average is closer to 60-70%. Their buy-and-hold approach means their funds realize capital gains less frequently.
In addition to turnover rates, capital gains distributions are the other major contributor to tax liability. When funds realize capital gains from selling securities, these gains get passed onto shareholders annually as capital gains distributions. American Fund Group’s funds generally have lower capital gains distributions than comparable funds. Over the last decade, their distributions have averaged under 2% of net asset value, compared to an industry average closer to 4-5%.
The combination of below average turnover and capital gains distributions makes American Fund Group’s funds relatively tax efficient. This can benefit investors, especially those holding funds in taxable accounts outside of retirement plans. The tax efficiency may help boost after-tax returns over the long run.
American Funds are well-suited for investors with a long-term perspective seeking actively managed funds. Specifically, American Funds appeal to the following types of investors:
The funds’ buy-and-hold approach pairs well with retirement accounts like 401(k)s and IRAs where money is intended to be invested for decades. The funds offer a variety of lifecycle options as target date funds for different retirement time horizons.
For investors focused on long-term capital appreciation, American Funds provide professionally managed equity exposure across market sectors and geographies. This can help grow wealth over time without requiring constant monitoring or trading.
Several American Funds target dividend-paying stocks and bonds to generate steady income streams. This can provide regular cash flow for living expenses during retirement.
While equity-focused overall, American Funds offers some fixed income and balanced funds for more conservative investors looking to temper market volatility.
American Funds’ patient, low-turnover strategy caters to buy-and-hold investors not needing to react to short-term market moves. The funds aim for consistent, long-term growth.
Those wanting professional active management without needing to select individual stocks can benefit from American Funds’ experienced investment personnel and research capabilities.
In summary, American Funds excel at providing actively managed exposure across assets classes for long-term, buy-and-hold investors not requiring significant income or capital preservation. The funds offer a one-stop-shop for retirement and other goal-focused accounts.
American Funds has faced some criticism over the years. Two of the main issues cited are:
Some investors argue that American Funds’ fees are too high, especially for passive index funds. The expense ratios on American Funds’ index funds tend to be higher than those of competitors like Vanguard. This reduces net returns for investors. Defenders counter that the funds are actively managed with rigorous research to identify the best stocks. The fees pay for skilled stock picking and oversight. However, critics feel the extra costs aren’t justified by the funds’ performance.
Large Asset Base Makes Nimbleness Difficult
With over $1 trillion in assets under management, American Funds is one of the largest fund families. Some contend this massive size makes it difficult for its funds to efficiently move in and out of positions. Trying to buy and sell stocks for hundreds of billions of dollars in assets presents liquidity challenges. American Funds rejects the notion that size hampers returns, arguing the large asset base allows the funds to invest anywhere while minimizing trading costs. Still, some investors prefer smaller, more nimble funds that can react quickly to investment opportunities.
Many investors considering actively managed mutual funds also look at alternatives like index funds, ETFs, and other active managers with lower costs. These options can provide similar exposure and diversification benefits compared to American Funds at a lower cost over time.
Index funds aim to match the performance of a market index like the S&P 500. Since they are passively managed without stock picking or trading, index funds tend to have significantly lower expense ratios than actively managed funds. For example, a S&P 500 index fund may charge 0.03% versus 0.5-0.75% for an active large-cap fund. While index funds won’t beat the market, they provide broad diversification and exposure for minimal cost over the long run.
Exchange-traded funds (ETFs) are similar to index funds in that they track market indexes at low cost. The difference is that ETFs trade throughout the day on exchanges like stocks, while mutual funds only trade at the end of each day based on their net asset value. ETFs can provide index exposure, sectors, factors, and more for expense ratios comparable to index mutual funds.
Other Active Managers
Some investment managers like Vanguard and Fidelity offer actively managed equity and bond funds with lower expense ratios than American Funds. These can provide active management and professional stock selection for less cost. However, they may still underperform comparable index funds over the long term.
American Funds offers a lineup of actively managed mutual funds targeting long-term growth through fundamental research and analysis. The funds follow a more conservative approach, focusing on dividend-paying stocks and higher-quality bonds.
While the funds tend to have higher expense ratios than index funds, American Funds has produced competitive returns over the long run in many of its key offerings. Flagship funds like The Growth Fund of America and The Investment Company of America have beaten their benchmarks over the 10- and 15-year periods.
The funds can appeal to buy-and-hold investors looking for professional, active management with a careful hand during market downturns. The funds limit overhead and turnover in an effort to maximize shareholder returns. While index funds continue gaining popularity, American Funds provides an alternative for those seeking active management with a prudent, quality-oriented approach.
Investors focused on minimizing fees and closely tracking indexes may prefer passive funds. But those comfortable paying for active management–with the goal of long-term growth and reasonable downside protection–can find solid options within American Funds’ diverse lineup of mutual funds.