A Solid Holding From American Funds

Key Morningstar Metrics for American Funds American Balanced

• Morningstar Medalist Rating: Silver
• Process Pillar: Above Average
• People Pillar: Above Average
• Parent Pillar: High

Change has been the watchword for American Funds American Balanced’s ABALX manager lineup. Lead principal investment officer Jeff Lager will leave the fund on May 1, 2024, as he prepares to retire. Another manager, Anne-Marie Peterson, will step off the fund on that date to focus on the other portfolios she runs. Effectively taking their place are Irfan Furniturewala and Mathews Cherian, who were disclosed as managers here on April 1. Another manager, Paul Benjamin, will take on Lager’s lead PIO duties, such as making the occasional tactical shift and overseeing the fund.

The fund should be able to absorb this turnover without much issue, just as it has through three prior manager departures since late 2020. Benjamin has been deeply involved with this portfolio for well over a decade, first as the coordinator of its analyst-run research portfolio and then as a manager since 2014. And both Furniturewala and Cherian have substantial previous experience with equity income mandates similar to this fund’s—the former manager has been named for nine years on American Funds Washington Mutual AWSHX, which earned a Morningstar Medalist Rating of Gold as of March 2024, while Cherian has spent six years running a piece of American Funds Fundamental Investors ANCFX, which is rated Silver.

The firm’s most prominent strength is equity research. The equity group supporting this fund is backed by dozens of analysts and has generated impressive results pursuing a growth-and-income mandate. (the managers aim to at least match the yield of the S&P 500). The fixed-income effort is also appealing, as that team’s process has become more disciplined in recent years and the firm has brought in proven personnel to bolster the group. At American Funds American Balanced, the team aims to offset equity volatility while adding value through security selection. Asset-allocation moves, directed by the lead PIO after discussions with the rest of the team, have been rare but generally additive. In early 2020, for example, equities were cut to 60% from 65% as valuations appeared stretched; the fund’s A share class held up better than its typical moderate allocation Morningstar Category peer and the Morningstar US Moderate Target Allocation Index in the ensuing sharp downturn. These combined efforts helped the fund surpass that index, 85% of peers, and a 60/40 blend of the S&P 500 and the Bloomberg U.S. Aggregate Bond Index (which is appropriate given the fund’s heavy emphasis on US securities) in the trailing 15 years ended March 2024.

American Funds American Balanced: Performance Highlights

Over the trailing three-, five-, 10-, and 15-year periods through March 2024, the fund’s A shares surpassed most of its moderate-allocation category peers and the category benchmark on total returns as well as Sharpe ratio (a measure of risk-adjusted performance). The fund has had a mixed record versus its internal benchmark (60% S&P 500/40% Aggregate Index), lagging it over the past five and 10 years but matching that hard-to-beat benchmark over three years and beating it over 15 years.

Security selection has been the primary driver of outperformance versus peers and the benchmark. The fund’s heavy stake in mega-cap stocks in recent years has also provided a strong tailwind, along with investing less in non-US stocks than the category average. Management occasionally makes asset-allocation moves that have proved timely. For example, cutting equities to 60% very early in 2020 when stocks’ valuations appeared lofty helped the fund lose a bit less than the category index in the sharp downturn of February and March. The conservative fixed-income portfolio, which eschews high-yield debt, has typically provided ballast in such declines.