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American Funds Washington Mutual Shines in Tough Times

This Gold-rated fund may be a bit old-fashioned, but its discipline helps it hold up when markets are at their worst. 

Alec Lucas, 02/12/2017

The following is our latest Fund Analyst Report for American Funds Washington Mutual AWSHX

American Funds Washington Mutual earns a Morningstar Analyst Rating of Gold for its ability to hold up well in cratering markets.

The fund once again proved its worth amidst turbulence during the 2015-16 correction. From the S&P 500's July 20, 2015, peak to its Feb. 11, 2016, trough, the fund's 10.7% loss was 2.2 percentage points better than the bogy's. That's impressive given that the fund had a modest overweighting in battered energy stocks, including top-25 positions in Royal Dutch Shell RDS.B and Enbridge ENB. Losing less in corrections and bear markets, such as the 2007-09 credit crisis, has helped the fund post a competitive long-term record. Its 6.5% annualized gain during the past decade through year-end 2016 ranked in the large-value Morningstar Category's top quartile, and its risk-adjusted returns were in line with the S&P 500's.

The fund's robust downside protection is no accident. Its strict investment criteria keep the portfolio centered on investment-grade companies with a long history of paying dividends and strong prospects for continuing to do so. Energy holding Enbridge, for example, plans to acquire fellow oil and gas pipeline company Spectra Energy SE in an effort to add a natural gas revenue stream and reinforce its dividend growth.

The fund's value orientation shows in the managers' willingness to buy franchises within out-of-favor sectors. In addition to energy stocks, the managers have found opportunity within the materials sector. Since 2015's fourth quarter, they've kept a top-15 stake in DuPont DD, which plans to merge with fellow chemicals firm Dow DOW and subsequently split into three separate companies. At year-end 2016, the fund's 17% combined energy and materials stake was 7 percentage points more than the S&P 500's.

The managers' record inspires confidence that they can navigate the dicey parts of the market. So too does their experience: The least-experienced member of the eight-person team has been in the industry for more than 20 years. The fund remains a great option for risk-averse investors.

Process Pillar: Positive | Alec Lucas 01/26/2017
This fund's inclusion requirements are the strictest among American Funds' large-cap offerings, but they've proven their worth and merit a Positive Process Pillar rating. Founded in 1952, the fund's investing criteria are rooted in rules formed in the Great Depression's aftermath to ensure prudent management of trust funds. Potential investments must clear a number of hurdles, including largely shunning the sale of alcohol and tobacco products. Firms must meet New York Stock Exchange listing requirements, even if they are not listed on the exchange. S&P 500 constituents, however, must make up 90% of the portfolio, which naturally leads to extensive overlap with the index. In 2010, American raised the limit on foreign holdings to 10% of assets from 5%, but the fund still remains one of its purest plays on U.S. large-cap stocks.

The fund's focus on income is similarly old-school, as it pursues yield in a disciplined way. It aims for a dividend yield greater than that of the S&P 500, but the fund largely sticks to investment-grade companies with a long history of paying dividends. In fact, only 5% of the portfolio may be invested in non-dividend-paying companies. Plus, firms must have paid their dividends in eight of the past 10 years and earned them in four of the past five years, which generally disqualifies those that have borrowed to cover their dividend in lieu of an earnings shortfall.

is an analyst of active strategies on the manager research team for Morningstar.

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