More investors now have access to this strong active shop.
Capital Group recently made its entire American Funds open-end lineup available commission-free on Fidelity and Schwab's brokerage platforms, providing greater access to one of the industry's flagship firms. Investors who have avoided the lineup may want to reconsider it. Indeed, the firm's competitive advantages run deep, especially in equities. Below is a select overview of the firm and lineup. It elucidates American Funds' key competitive advantages and areas for improvement.
American Funds' offerings come in several series, such as a target-date retirement series and a college target-date series. At the core, though, is a 35-fund lineup composed of 14 equity funds, four allocation funds, and 17 bond funds. Their scope is global and covers most asset classes, with some overlap. It's not exhaustive, however. The firm doesn't have a fund in the foreign large-value Morningstar Category, for example, and smaller-cap strategies are lacking. Of the 27 funds assigned a Morningstar Analyst Rating in American Funds' core lineup, 22 are Medalists, including all of its equity and allocation funds. Exhibit 1 lists the medalists by the tickers of their no-load F1 shares, newly available to retail investors at Fidelity and Schwab.
Multimanager System: Built for Scale, Diversity of Style, and Succession
The first thing that stands out about American Funds' retail lineup is its size. As of August 2016, the firm's 35 U.S. open-end mutual funds, excluding money markets and funds of funds, held nearly $1.3 trillion in assets under management, which ranked second only to Vanguard's $2.7 trillion. American Funds' equity and allocation funds are some the industry's largest. Indeed, at the end of 2016's third quarter, they accounted for 10 of the 15 biggest actively managed U.S. open-end funds.
American Funds' mammoth equity offerings are different from active peers of similar size led by a single manager or a team of managers. American Funds' multimanager system helps to handle their huge asset bases by blending the two approaches. It lets individuals invest in line with their conviction and according to their distinct styles while at the same time benefiting from collaboration, dialogue, and debate with their peers.
Unity in diversity is at the heart of the multimanager system. It divides each fund's portfolio into separately run sleeves. Managers oversee their own sleeves, and the analyst-run research portfolio collectively comprises another sleeve. High portfolio turnover is frowned upon, but managers have freedom and need meet only a fund's general mandate, such as an income target, in running their sleeves. They also benefit from consulting with analysts who are fellow investors. Indeed, the clearest indication of investment recommendations are the particular stocks and weighting of those stocks in analysts' own sector-focused sleeves of the portfolio. At the end of the day, though, managers and analysts make their own buy, sell, and sizing decisions. The result is a collection of high-conviction portfolios run in a variety of styles. It is the role of each fund's principal investment officer, in consultation with a senior oversight board, to ensure that the styles complement one another in service of the fund's mandate. When done well, the combination of separately managed sleeves mutes volatility but doesn't limit strong investment results over a full market cycle.
The multimanager system helps with succession. The opportunity to run sector-specific money facilitates analysts' transition into diversified portfolio management. That process is slow and deliberate. Analysts tapped to become portfolio managers start with small slivers of the portfolio. (Though, of course, even a 1% slice of gigantic funds such as American Funds Growth Fund of America GFAFX amounts to more than $1 billion in assets.) At this stage, the firm makes a habit of not publicly naming them and giving them space over a multiyear period to hone their investment processes. If results are good and their style is complementary to the other managers', Capital Group may eventually name them as managers on the fund. Not every undisclosed manager makes it this far, but those who do typically have about 10 years of investment experience as analysts and anywhere from three to five years as diversified money managers before disclosure.
The multimanager system facilitates transitions out of management as well. The system allows for the grooming of one or more undisclosed managers to replace managers who are expected to retire soon. It can also help a fund overcome the unexpected loss of a manager. That happened in July 2015 when American Funds Growth Fund of America suffered the untimely death of its then longest-tenured manager James Rothenberg. As Rothenberg had been nearing retirement, he managed one of the portfolio's smaller sleeves. While that still added up to at least $5 billion, it was less than 4% of the fund's assets at the time. Plus, considerable overlap between Rothenberg's largest holdings and those of the fund's 11 remaining managers made it easier for them to absorb those holdings and minimize portfolio turnover.