Why Investors Are Dumping a Champion Fund Company

NEW YORK ( TheStreet) -- Shareholders of American funds should be delighted with the performance of American Funds Growth Fund of America ( GFFFX). This year the fund returned 22%, topping the S&P 500 by 4 percentage points and surpassing 93% of large growth peers, according to Morningstar.

The strong showing should not come as a surprise. During the past 15 years, the fund crushed the benchmarks, returning 8.2% annually and topping the S&P 500 by more than 3 percentage points. But not everyone is impressed. During the past year, shareholders withdrew $34 billion in assets from the fund, a huge outflow from a portfolio that has $112 billion.

Growth Fund of America is not the only American funds portfolio that delivered winning returns and suffered outflows. American Funds Fundamental Investors ( FINFX) returned 18.6% this year, but it recorded outflows of $2.8 billion. American Funds Capital World ( WGIFX) suffered $8.2 billion in outflows, even though the fund returned 19.8%.

Why are so many shareholders throwing in the towel? Many appear to be caught in a panic. Shaken by the financial crisis, investors have been dumping large-cap equity funds and shifting to bonds. But so far the exodus has been a mistake. During the past three years, equity funds have outdone bonds by a wide margin. Now the outlook is positive for 2013. With housing markets improving, the economy should grow. Chances are that the fiscal cliff will be resolved, giving consumers more confidence to spend.

The outflows have been particularly severe for actively managed funds, which aim to outdo the benchmarks. Angry that portfolio managers provided little protection in 2008, shareholders have been selling active funds and buying ETFs and index funds.

Plenty of fund companies have suffered outflows. But the exodus is particularly noticeable at American Funds, overseeing $915 billion in assets, American accounts for 10% of all mutual fund assets and ranks as the largest company that focuses primarily on actively managed equity funds.

American Funds grew over decades by following a conservative brand of stock picking. While other companies launched faddish funds, American focused on disciplined strategies that sought to buy undervalued blue chips. The funds were sold by legions of financial advisors who trusted the company to deliver returns that would satisfy clients.

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.