NEW YORK (
) -- Investors have been abandoning
, 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
American Funds AMCAP
American Funds Income of America
American Funds EuroPacific Growth
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
, 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.
American Funds Growth Fund of America
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
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.
In the past, most of the fund shares were sold with front-end sales loads of 5% or more. These days many shareholders avoid up-front costs by investing through retirement or brokerage accounts in which shares come with no loads.
Which funds should you consider? A top choice is American Funds AMCAP, which has returned 2.9% annually during the past 10 years, outdoing 91% of large growth competitors. The portfolio holds reliable growth names, including software giant
, agriculture powerhouse
and medical device maker
. True to the fund company's preference for bargain shopping, the portfolio has a price-to-earnings ratio of 14, compared to 17.5 for the average large growth fund. Despite their relatively low prices, the portfolio holdings have earnings growth rates that are about the same as the category average.
Investors seeking a tame choice should consider American Funds Investment Company of America, which has returned 3% annually during the past 10 years, outdoing 81% of large blend competitors. The portfolio focuses on solid dividend-paying stocks, including
and pharmaceutical giant
. The dividend stocks enabled the fund to excel in the downturn of 2008. The fund has also shined in better times, outdoing the
in eight of the past 10 years. Despite the strong record, investors have withdrawn $5.4 billion from the fund in the past year.
To own international stocks, consider American Funds EuroPacific Growth, which has returned 6.4% annually during the past 10 years, outdoing 93% of foreign large blend funds. The portfolio holds a broad collection of growth and value blue chips. Big holdings include beer giant
Anheuser Busch InBev
and Mexican mobile powerhouse
.Searching for bargains, the portfolio managers are willing to go against the crowd. In the past year, the fund has lowered its stake in the emerging markets as stocks have soared in Latin America and Asia.
A the same time, the fund has favored unloved Japanese markets, buying such stocks as
Avoiding a Winner
During the past year, investors have been withdrawing funds from money manager American Funds despite strong long-term records.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.