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Why Investors Are Dumping a Champion Fund Company

Stocks in this article: GFFFX FINFX WGIFX AEPGX

As technology stocks soared in the late 1990s, the cautious approach lagged the hottest performers. But when the technology bubble burst, American Funds shined. Having shunned high-priced Internet stocks, Growth Fund of America and other funds outdid the big majority of their peers. Impressed with the reliable record, financial advisors rushed to invest in the solid performers. In 2002, American took in $38 billion in inflows, accounting for 28% of the industry's total.

American Funds fared less well in the turmoil of 2008, when some large-cap value managers held big stakes in troubled financials. The bad results contributed to outflows. In 2010, investors withdrew $48 billion from the company. Results began improving in 2011, but the outflows accelerated. In 2012, investors have withdrawn more than $63 billion.

Instead of abandoning American Funds, shareholders should consider new investments. At a time when many blue chips appear modestly priced, the cautious style should perform well in the coming years. Make no mistake, American Funds is not likely to lead the performance standings in any one year. Staying broadly diversified, the portfolio managers avoid big bets on individual stocks or sectors. But the careful approach can deliver competitive returns over the long term.

A top choice is American Funds EuroPacific Growth (AEPGX), which returned 18.8% this year. During the past 15 years, the fund returned 7.5% annually, outdoing the MSCI international benchmark by 3 percentage points annually.

EuroPacific Growth achieved its strong record by controlling risks and topping most competitors in downturns. During the financial crisis, the portfolio managers shifted away from banks and other businesses with less-than stellar balance sheets. Instead, the managers focused on resilient healthcare and telecom companies that weathered the turmoil in relatively sound shape. That helped the fund outdo most competitors in 2008. The portfolio focuses on rock-solid blue chips. Holdings include Danish drug maker Novo Nordisk (NVO) and Mexican telecom giant America Movil (AMX).

Another strong choice is American Funds Fundamental Investors. During the past ten years, the fund returned 9.2% annually, outdoing the S&P 500 by 2 percentage points and topping 96% of large blend funds. The managers look for modestly priced stocks with strong balance sheets and growth potential. The fund often holds sizable stakes in foreign stocks. Holdings include Home Depot (HD) and pharmaceutical maker Merck (MRK).

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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