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American Funds Sees Investors Flee

NEW YORK ( TheStreet) -- Investors have been abandoning American Funds, the giant money manager. During the first 10 months of 2010, shareholders withdrew $38 billion, according to Morningstar.

Are the outflows justified? Some advisors think so. They argue that the company's funds have gotten too big to trade nimbly; they may have a point.

Some of the portfolios have more than $50 billion in assets. But so far the fund group boasts a remarkable long-term record. Of the company's 13 funds with 10-year records, 12 outperformed more than 50% of their peers. Funds that finished in the top 10% of their categories include American Funds American Balanced (ABALX), American Funds AMCAP (AMCPX), American Funds Income of America (AMECX), and American Funds EuroPacific Growth (AEPGX).

The performance of American Funds was particularly noteworthy in the downturn of 2008. During the turmoil, most of the company's portfolios outdid their peers by wide margins.

Long-time shareholders should not have been surprised by the resilient showing. Most American Funds are sold by financial advisors, and for decades, advisors have turned to American Funds for reliable performance. The steady results have enabled American to attract $940 billion in assets, ranking as the second-largest fund family after Vanguard, which has $1.2 trillion.

The success of American Funds can be attributed to a proven formula. Portfolio managers focus on buying solid stocks selling at modest prices. The funds are overseen by teams of managers. Each manager operates independently, overseeing a portion of the assets in the fund. As funds expand, the company adds more managers.

While American Funds Growth Fund of America (AGTHX) has $150 billion in assets, the burden is shared by nine managers. That may explain how the fund has continued to excel despite its huge size.

A key factor in the company's success has been an emphasis on holding down costs. The company charges modest annual expense ratios. American Funds Investment Company of America (AIVSX) is typical. The fund has an expense ratio of 0.66%, compared to a figure of 1.28% for the average large blend fund. Besides charging below-average expenses, the company holds down costs by doing relatively little trading. Funds that rarely trade lose less to brokerage commissions and transaction costs. American Funds Investment Company of America has an annual turnover rate of 28%, compared to 79% for the average large blend.

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