American Funds raise eyebrows

Los Angeles: Los Angeles-based mutual fund giant American Funds took 80 years to create just 30 fund portfolios. Now it's launching three funds in the span of three months.

The sudden burst of activity has raised eyebrows in the investment business because it comes as American Funds continues to suffer cash outflows from its bread-and-butter stock funds, which for decades had been among the industry's most popular with small investors.

This week, the company is launching a mortgage-bond portfolio and a fund that will own tax-free bonds issued by New York municipalities. The third fund, due in February, will be a global "balanced" fund that will invest in bonds and stocks worldwide.

A broader lineup

American Funds says the new funds are an attempt to broaden its product lineup and not a specific response to investors' relative loss of interest in equity funds — or their voracious appetite for bonds.

Paul Haaga Jr, chairman of Capital Research and Management Co, the sister company that manages American Funds' $955 billion (Dh3.5 trillion) in assets, said the timing of the bond fund launches was coincidental and that the portfolios had been in development for years.

"We do it when we're ready to do it," he said. Still, the funds will give American something new to sell amid tough times for its stock fund business.

Since the market crash of 2008, the company's specialty — long-term investing in shares of big-name multinational firms that American believes are bargains — has become the least-popular mutual fund strategy with individual investors, according to research firm Morningstar Inc in Chicago.

American Funds' stock focus is "the worst place possible in terms of investor sentiment now," said Kevin McDevitt, who tracks the company for Morningstar.

Instead, many investors buying stock funds have turned to low-cost "index" funds such as those sold by Vanguard Group.

What's more, millions of small investors have turned against stocks altogether since the crash and have shifted their savings to bonds in the hope of earning steadier returns with lower risk of principal loss.

As a growing number of investors have pulled money from American's equity funds, the company suffered a net cash outflow of nearly $39 billion in the first ten months of this year, or about 4 per cent of assets, up from $25.3 billion in all of 2009. In part, American Funds and its parent firm, privately held Capital Group Cos, have been victims of their own success in the last decade.

Historically, one of American Funds' drawing cards for investors was its conservative investment style. The company's huge stock funds, including Washington Mutual Investors and Investment Co of America, had reputations for holding up better than the broad market in downturns.

American Funds has always used advisors to market its funds to the public; the company doesn't sell its funds directly to investors, except through 401(k) retirement accounts. From 2004 through 2007, American Funds' net cash inflows topped $73 billion a year, as investors reeling from tech-stock losses sought safer equity ideas.

Equity side

"They took in money that was maybe three to four times greater than anybody else on the equity side," said Geoff Bobroff, head of fund research firm Bobroff Consulting. But when the 2008 crash hit, American's funds were slammed with the rest of the market. Some of its most popular stock funds dropped more than 30 per cent that year, and some stunned investors fled. Haaga acknowledges that the company should have done a better job from 2002 to 2007 of managing what were "unreasonable expectations" .

One hurdle American may face with its new bond funds is that, in a crowded field of fixed-income portfolios, none of its 13 existing bond portfolios has a coveted four- or five-star performance rating from Morningstar. They all have either two or three stars. Also, the company's flagship bond portfolio, the $40-billion Bond Fund of America, has struggled in recent years. Haaga said American wouldn't veer from its strategy of patient investing for the long haul and was trying to keep its investors focused on that concept.