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Three Lessons about the American Funds

Read on for some key insights into the big fund family.

Paul Herbert, 01/03/2007

Below is an article from the November issue of the Morningstar Fund Family Report on American Funds, our monthly newsletter dedicated to helping American Funds investors find superior long-term investment opportunities. To review a risk-free trial issue, click here. Fund Family Reports on Fidelity and Vanguard are also available.

All figures are as of November.

In recent months, my Morningstar analyst colleagues and I have had several worthwhile conversations with portfolio managers and others at Capital Research & Management Co., the advisor to the 30 funds in the American Funds lineup. Here I want to share some of what I think are the most important takeaways from these meetings for investors in these funds.

1. Asset growth remains a key concern, the firm's arguments notwithstanding.
The folks at American Funds continue to bristle at my suggestion that large funds such as Growth Fund of America AGTHX, which now stands at $156 billion in assets, could run into some trouble because of their large size.

Most of the push-back centers around three ideas. First, the firm says it has long been planning for the growth it has experienced in recent years. For example, the multiple-manager system, which has been in place for decades, safeguards against the harm that can result from individual managers running too much in assets. Second, Growth Fund's recent record proves that size isn't a hindrance. Third, closing funds--I have suggested that CRM at least examine shutting off access to Growth Fund in the past--is overrated because the typical closing doesn't slow asset growth by very much, and there's evidence that funds underperform after closing.

For the most part, I'm unimpressed with these arguments. In regard to the firm's first assertion, that it has long been planning for huge asset growth, it may be reasonable to assume that, because of the firm's multimanager structure, individual managers at big American funds aren't running as much as the bosses of bulky funds from other shops such as Fidelity and Vanguard. But we can't verify that assumption. American doesn't disclose how much individuals are running, even though other firms provide this information in their funds' Statements of Additional Information filed with the SEC.

Spelling out this information seems to me to be an obvious way to convince people (including me) that the funds' girth is under control.

Second, although Growth Fund's performance has been outstanding, we've noticed other growing funds deliver strong short-term showings, perhaps because putting new money into existing positions drives up the prices of these securities. It's a slowdown in long-term performance that's more of a concern.

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