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The Scoop on American Funds' New Offering

International Growth & Income holds promise.

Greg Carlson, 08/26/2008

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.

American Funds is doing something quite out of character: It's bringing out a new stock fund. International Growth & Income, which is slated to launch in October 2008, will be the first all-equity offering from American since New World NEWFX in 1999. I've been a big fan of the way American Funds manages its lineup: The shop doesn't bring out funds that capitalize on a hot investing trend--indeed, its new funds typically focus on areas that are out of favor at the time of their launch. What's more, while the firm's funds share a basic investment philosophy as well as resources, American doesn't present investors with a large number of funds that invest quite similarly (like, say, Fidelity and its armada of large-growth funds). Thus, on those rare occasions when American does decide to roll out a new fund, I pay close attention.

Taken at face value, International Growth & Income's mandate to invest primarily in companies outside the United States doesn't appear to be an especially contrarian one at this point: Foreign stocks outperformed their U.S. counterparts for several years prior to 2008, thanks in large part to the decline of the U.S. dollar against most major currencies. However, this fund will focus primarily on larger, financially healthy companies that pay dividends, which haven't looked so hot for much of that span compared with leveraged, economically sensitive firms (although debt-heavy companies have struggled over the past year). What's more, the managers of American's existing equity funds that own dividend-payers have told me they're finding many more attractively valued dividend-paying firms outside of the U.S. than within it; this fund gives American an opportunity to focus more purely on them. American has long preferred financially healthy firms in the first place--it's difficult to find a fund in its lineup that owns much in the way of deeply troubled companies or speculative highfliers that have yet to generate profits--but here we'd expect a higher yield. Consider that world-stock offering Capital World Growth & Income CWGIX pays more in dividends than, say, New Perspective ANWPX.

Plenty of Potential
As with most of American's funds, this one looks to be fundamentally sound from a variety of angles. Its three managers (who will each run separate chunks of the fund) all boast significant experience: Each has worked for the shop for at least 15 years, each has run a portion of an American fund for at least nine years, two of the three have picked stocks for at least one fund that invests heavily overseas, and two of the three have worked on a fund with income as part of its mandate (Income Fund of America AMECX). And because American has long emphasized a global approach to investing, those managers will have the advantage of a massive research staff that covers more companies outside the U.S. than just about any other shop out there. This fund won't have a separate piece run by the research analysts at first, but I expect that to change if its asset base grows down the road, as I expect it will. Finally, although the fund's expense ratio will include a comparatively high 0.30% 12b-1 fee (about which I plan to question American once the fund is launched and the firm is able to discuss it), I'd expect this offering to be cheaper than the vast majority of its broker-sold rivals right out of the gate, as are all of its other funds.PAGEBREAK

The new fund is also a good fit within American's fund lineup. There's currently just one pure foreign-stock fund, EuroPacific Growth AEPGX (which doesn't have an income component), to round out the portfolios of investors who otherwise own one or more of American's nine domestic-stock funds. While that huge fund boasts a fine record, low costs, and an experienced management team, American Funds investors could use an option that should be less growth-oriented. Dividend-paying companies are primarily found within sectors traditionally favored by value investors, so I'd expect this fund to land in the large-value section of the Morningstar style box or straddle the line between large value and large blend. The fund will likely cover some of the same overseas terrain as world-stock fund Capital World Growth & Income and world-allocation fund Capital Income Builder CAIBX, both of which also have an income focus, so investors with heavy stakes in those funds would likely find considerable overlap in owning the new offering. But from a stylistic perspective, this fund should serve as a fine complement to American's domestic large-growth funds, including Growth Fund of America AGTHX. I'll refrain from recommending the fund until it launches and more details are available, but investors should keep it in mind.

Greg Carlson is an analyst with Morningstar.

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