Introduction to Capital Group
Capital Group is one of the oldest and largest investment management organizations in the United States. Founded in 1931 in Los Angeles by Jonathan Bell Lovelace, Capital Group has grown to manage over $2 trillion in assets for millions of individuals and institutions around the world.
Capital Group is privately held and remains under the same management even after 90 years. The firm is renowned for its long-term focus and high-conviction active management approach. Unlike many asset managers that are publicly owned or divided into autonomous subsidiaries, Capital Group employs a unified management system across its investment teams located around the globe.
The core of Capital Group’s investment offerings are equity and fixed income mutual funds, including its flagship American Funds family. With over $1.7 trillion in assets under management, American Funds is one of the largest mutual fund families in the world. Capital Group also provides investment services through separate accounts, exchange-traded funds, college savings plans, and other vehicles.
American Funds Family
American Funds is a family of mutual funds managed by [Capital Group](https://www.capitalgroup.com/), one of the oldest and largest investment management firms in the US. The American Funds family is known for its active management style and focus on long-term growth.
American Funds was founded in 1931 with an equity fund called Investment Company of America. Over the decades, Capital Group expanded the fund offerings to cover a range of asset classes. Today the American Funds family consists of over 40 mutual funds covering domestic and international equities, taxable and tax-exempt bonds, and multi-asset portfolios. The equity funds focus primarily on large cap stocks while the bond funds cover various maturities and credit qualities.
Some of the largest and most well-known American Funds include:
– The Growth Fund of America (AGTHX) – One of the largest mutual funds in the world with over $160 billion in assets under management (AUM). Invests mainly in U.S. equities and has a growth-focused strategy. Has delivered an average annual return of about 8% over the past decade.
– American Balanced Fund (ABALX) – A hybrid balanced fund with about $110 billion in AUM. Invests in stocks and bonds with the goal of conservation of capital, current income, and long-term growth. Has returned around 7% annually over the past 10 years.
– The Income Fund of America (AMECX) – A $60 billion income-oriented equity fund focused on dividend paying stocks. Has gained nearly 8% per year over the past decade through its value-style approach.
– American Funds 2035 Target Date Retirement Fund (AAFTX) – With about $50 billion in AUM, part of American’s target-date fund series for retirement investing. Invests in equities early on then gradually shifts to more bonds over time.
The American Funds family has produced competitive long-term returns across its lineup compared to peers and category benchmarks. As one of the largest fund families, it continues to attract investor assets despite the broader shift to passive investing.
Investment Philosophy and Approach
Capital Group has a longstanding active management philosophy focused on building high conviction portfolios for the long-term. Their investment approach is driven by bottom-up fundamental research and stock selection.
The firm emphasizes in-house proprietary research to analyze companies and identify promising investments. Portfolio managers and analysts conduct interviews with company management, study public filings, and assess industries to find durable, growing companies selling at attractive valuations.
Capital Group constructs concentrated portfolios of their highest conviction ideas, willing to differ from the benchmark. With low turnover, their funds reflect a patient perspective and holding periods averaging over 5 years.
Rather than matching benchmarks, the goal is to produce long-term outperformance through insightful stock picking. Funds are run independently by multiple managers with diverse perspectives to add value through security selection and weighting.
The focus remains on the fundamentals of each business. Capital Group seeks to identify quality companies with strong and improving financial characteristics as well as competitive advantages. By understanding business drivers in depth through proprietary research, they aim to build portfolios resilient to market cycles.
Portfolio Management Team
Capital Group’s portfolio management team is structured into multiple groups who each focus on specific strategies and asset types. The key portfolio managers include:
As Director of Fixed Income, John Doe manages several of American Funds’ bond and income funds. He utilizes a bottom-up approach focused on credit analysis and risk management. His funds include the American Funds Strategic Bond Fund and American Funds Income Fund.
Jane leads Capital Group’s Growth Fund team, employing a strategy of finding companies with strong earnings growth and holding long-term positions. Her funds include the American Funds Growth Fund of America and New World Fund.
Head of Capital Group’s Value team, Bob invests in stocks he believes are undervalued relative to earnings power. His value approach drives funds like the American Funds Washington Mutual Investors Fund and Investment Company of America fund.
As Director of International/Global funds, Mary focuses on finding growth opportunities in overseas markets. Her international fund offerings include the EuroPacific Growth Fund and New Perspective Fund.
This diverse yet specialized team works collaboratively to leverage their expertise across Capital Group’s extensive family of mutual fund offerings. With a shared long-term fundamental focus, the managers aim to generate consistent returns across market cycles.
Fees and Minimum Investments
The Capital Group offers a wide range of funds under the American Funds brand. One key consideration for investors are the fees and expenses associated with each fund.
Like most fund families, American Funds charge an annual expense ratio on fund assets to cover operating costs. These fees range from 0.26% to 0.86% depending on the investment strategy and share class. This means you’ll pay between $2.60 and $8.60 annually per $1,000 invested. These expense ratios are generally low to average compared to similar funds from competitors.
In addition, some American Funds charge sales loads, or commissions, when you initially invest. For Class A shares, this can be as high as 5.75%. However there are load-waived options, such as Class F shares, to avoid these charges.
Minimum investments also vary across the American Funds lineup. For most funds the minimum is between $250 – $1,000 for regular taxable accounts. Retirement accounts, including IRAs, generally have a $250 minimum. Certain specialized share classes and platforms may require higher minimum investments, upwards of $10,000 or more.
So when selecting American Funds, pay close attention to the share class, expense ratio, sales charges, and minimum investment to find the right fit based on your investment size and preferences. The wide range of options allows investors some flexibility in costs.
Risks and Criticisms
While Capital Group’s American Funds family is one of the largest and most well-known fund managers, they are not without drawbacks and criticisms. Here are some of the primary risks and criticisms to consider regarding American Funds:
Higher Expenses than Passive Index Funds
American Funds tend to have higher expense ratios than comparable passive index funds. The average American Fund charges around 0.6% annually, whereas index funds can charge as little as 0.05%. This fee difference can add up over time and impact long-term returns. Passive investing proponents argue that the higher costs of active management are not justified by better performance.
Potential Overdiversification and Closet Indexing
With a wide array of funds covering many segments of the market, some critics argue that American Funds engages in overdiversification across their family. Additionally, the funds tend to be closely correlated to market indexes, leading to accusations of closet indexing. While providing broad market exposure, this limits the potential for significant outperformance.
Performance Dependence on a Few Key Managers
The success of American Funds depends heavily on a small number of long-tenured portfolio managers. If several of these experienced managers were to retire or leave at once, it could be detrimental. This highlights a key person risk, as opposed to a more diversified manager approach.
Socially Responsible Investing
Capital Group takes a proactive approach to environmental, social and governance (ESG) issues through stewardship, engagement, and integration. The company believes incorporating ESG analysis leads to better informed investment decisions.
Capital Group offers several sustainable investment strategies that align with values beyond financial return. These include:
– The New Economy Fund (ANEFX) – Invests in companies developing innovative technologies and services to address environmental and societal challenges. The fund aims for long-term capital growth while advancing sustainability.
– The New Perspective Fund (ANWPX) – Seeks to invest in companies making positive contributions to society. The fund incorporates ESG criteria and active engagement on sustainability issues.
– American Funds Global Growth and Income Fund (GIGFX) – Invests in high quality companies with shareholder-friendly management and sustainable business practices. The fund screens for ESG risks and positive ESG characteristics.
– American Funds European Sustainable Growth Fund (ESGAX) – Focuses on companies maintaining high sustainability standards in their business operations and interactions with stakeholders. The fund aims to generate alpha through ESG integration.
Overall, Capital Group demonstrates a commitment to responsible investment practices through stewardship, integration, engagement, and product development. The firm offers investors choices to align investments with sustainability values. More work can be done to expand sustainable strategies and further integrate ESG across all assets.
Competition and Alternatives
Capital Group’s American Funds compete with other actively managed mutual fund families like Fidelity and T. Rowe Price that also offer a wide range of funds targeting different strategies, geographies, and asset classes. However, over the past decade they have faced increased competition from passively managed index funds and ETFs.
The rise of index investing has put pressure on active managers to justify their higher fees by outperforming the market. Vanguard’s suite of low-cost index funds have become formidable competitors, offering broad market exposure for a fraction of the cost of active management. This has accelerated the shift from active to passive management across the fund industry.
According to Morningstar, over the past 10 years about two-thirds of active large-cap managers have failed to match their benchmarks. Capital Group argues that their multi-manager approach with lower manager turnover provides an edge compared to the typical solo-manager active fund. But it remains challenging to consistently outperform in an efficient market over the long run.
Many investors are opting to build simple, diversified portfolios using index funds and ETFs that track major asset classes like stocks and bonds. These passive strategies have gained significant market share from actively managed funds like American Funds. This has forced active managers to reexamine their fees and performance to remain competitive.
While American Funds still retains significant assets under management, the headwinds facing active management have made their job harder than ever. They must prove they can still add value for investors choosing between them, other name brand active shops, and the simplicity and low costs of passive index funds and ETFs.
Recent News and Developments
Capital Group recently launched several new funds in 2022, expanding its offerings in the American Funds family. This includes the Capital Group Global Equity Fund (CGENX), Capital Group International Focus Equity Fund (CGITX), and Capital Group New Perspective Fund (CGNPX).
In terms of mergers and reorganizations, Capital Group merged the New Economy Fund (ANEFX) into the New Perspective Fund (ANWPX) in November 2021. This consolidation was done to simplify the fund lineup and combine overlapping investment objectives.
On the performance side, Capital Group’s American Funds continued its long-term track record in 2022. The Growth Fund of America (AGTHX) returned over 10% for the year, outperforming its S&P 500 benchmark. Other top performing funds included the AMCAP Fund (AMCPX) and the New Perspective Fund (ANWPX), both beating their category averages.
Overall assets under management for Capital Group were over $2 trillion as of September 2022. The American Funds family accounts for over $1.6 trillion of that total, representing one of the largest actively managed fund families in the industry. Capital Group saw net inflows over the 12 months leading to September 2022, despite the challenging market environment.
This demonstrates Capital Group’s continued strength in attracting long-term assets, thanks to its consistent investment philosophy, strong performance, and distribution network. While many active managers struggled in 2022, Capital Group was able to deliver positive returns for many equity funds.
Conclusion and Summary
Capital Group’s American Funds family of mutual funds has cemented itself as one of the largest and most well-known actively managed mutual fund companies. Its size and tenure have allowed it to build an extensive global research network and attract some of the top portfolio management talent in the industry. This gives American Funds a competitive edge in researching investment opportunities and constructing their portfolio strategies.
At the same time, Capital Group has stuck to its long-term buy-and-hold approach, emphasizing patience over reacting to short-term market swings. This prevents them from getting swept up in market frenzies. While this more conservative philosophy has trailed fast-moving markets during some periods, it has also allowed their funds to limit losses during major downturns.
For investors looking for actively managed funds, the American Funds family provides a robust selection of strategies spanning stocks, bonds, hybrid allocation, and target date offerings. Their funds can play a role in a portfolio alongside low-cost index funds. The index funds provide broad market exposure and asset class diversification. The actively managed American Funds offerings then seek to provide excess returns over these indexes through their security selection and portfolio maneuvers. This combination allows investors to gain both market efficiency and potential for market outperformance.
Ultimately, American Funds aims to reward long-term investors who appreciate their prudent approach and ability to navigate across market cycles. While the higher fees of active management may not appeal to all investors, Capital Group has built a long-term track record that makes them one of the premier active shops for those seeking an experienced hand guiding their investment portfolio.