Size-induced large-cap focus could have benefits, though, especially these days.
After suffering $50 billion in 2010 outflows, one might conclude that asset bloat is less of a concern for American Funds today than it had been in the past. But it still remains an issue.
Even though American has experienced greater outflows (more than $80 billion through February) than any other family over the past two years, the firm's overall assets under management have recovered quite nicely, dwarfing what it has lost in redemptions. Total assets plummeted to $636 billion in February 2009 after peaking at $1.2 trillion in October 2007. Since then, total assets have recovered to $982 billion, a gain of nearly $350 billion.
That has occurred despite not just net redemptions, but also the family's generally middling relative returns in 2010. Last year the average American equity fund landed in its category's bottom half.
Nevertheless, a scorching rally can make up for a lot. The S&P 500 Index has roughly doubled since the market bottomed on March 9, 2009. This has re-flated American's asset base and leaves it second in size only to Vanguard, which has nearly $1.3 trillion in mutual fund assets under management.
No Precedent for Closure
Unlike index-king Vanguard, though, all of American's assets are actively managed, making asset size a potentially greater hindrance. Even so, Vanguard has been more responsive to size, closing four of its actively managed funds to new investors as they have grown. In contrast, even though it runs several of the largest actively managed mutual funds, American has never closed any of its offerings.
In general, closing a rapidly growing fund, or one that is in danger of becoming unwieldy, is often in the best interests of shareholders. It keeps the asset base at a reasonable size, allowing a fund to continue executing its strategy unencumbered. Plus, because inflows often spike during market rallies, the manager of a closed fund isn't forced to keep buying securities as valuations become inflated.
Directors: Being Unaffiliated May Not Be Enough
While it's possible that American could eventually shift course and close its first fund, the prospect looks unlikely. Part of that owes to precedent, but it also stems from attitudes on American fund boards. American deserves credit for the fact that independent directors claim 75% of board seats, including every board chair. However, even though these board members are unaffiliated with the firm, that doesn't necessarily mean that they have always acted as forcefully as they might have on shareholders' behalf.
This came up after we recently spoke with two of American's independent directors. Both said that asset size was not a problem for the firm. One board member then went a step further, saying that the boards have never seriously considered pressing for the closure of any fund.