American's managers have been busy buying unloved large caps.
In this article from the April 2006 issue of Morningstar's Fund Family Report on American Funds, our monthly newsletter dedicated to helping American Funds investors find superior long-term investment opportunities, I looked at the funds' approaches to various out-of-favor areas of the large-cap landscape. To review a risk-free trial issue of our Fund Family Report on American Funds, click here. Fund Family Reports on Vanguard and Fidelity are also available.
American Funds' managers--even its growth skippers--have gained a reputation for sticking their necks out to buy stocks others are ignoring. There are countless examples of names that American's managers picked up when others were pessimistic. An article in The Wall Street Journal in early April indicated that American had been buying up shares of Citigroup
I'd like to take a closer look at what the firm sees when it looks through today's bargain bin. Focusing on whether American seems to be sticking to its contrarian roots, even as its organization grows and changes, will provide an idea of how the funds may perform in the years ahead.
Specifically, I started with a list of U.S. stocks with market caps greater than $10 billion that failed to beat the S&P 500 Index's 4.9% gain in 2005. Then I looked at whether and by how much the firm either added or reduced its stakes in those firms. I focused on large caps because Capital Research & Management (CRM), advisor to the American funds, typically traffics in bigger stocks, and I paid particular attention to the firm's attitude toward stocks from certain lagging areas of the market, including big pharma, media conglomerates, and mega-cap banks.
Picking and Choosing among Drug Stocks
There have been plenty of pickings for penurious investors among drugmakers in recent years. The group was one of the strongest performers in the 1990s, but more recently the market has been focusing on these companies' warts, such as bloated cost structures and glaring unanswered regulatory and safety questions. In recent years, American's funds--in particular its growth offerings such as Growth Fund of America
It appears that these stocks got cheap enough for American to be enticed to a greater degree last year.
Seven of the eight largest U.S. drugmakers trailed the S&P 500 in 2005, and CRM added significantly to its stakes in five of these companies--Abbott Labs
Many argue that these companies offer a pretty compelling combination of low valuations, strong profitability, and ship-shape financial positions. It appears that some folks at American may be starting to agree.
Funds with the biggest stakes in drugmakers include Washington Mutual
Mostly Tuning Out Media
Media stocks have also stunk lately after shining during the bull market. In the case of these companies, seemingly senseless mergers, accounting shenanigans, and overinvestment in the wrong areas have made owning and watching these stocks a waking nightmare since the market bubble burst.
For a number of years, Time Warner
Funds with the biggest stakes in media include New Economy
More Than Just Citi
The expectation (and then the reality) of higher interest rates has been the elephant in the room for banks for a few years now, and it has kept investors from getting too excited about buying them. (The fear is that banks will have to increase the yields they offer customers on interest-bearing deposits faster than they can raise rates on the interest they receive loaning money.) Some of the big names have actually held up pretty well amid the concerns--these firms are well diversified, and some of the largest stocks jumped in 2003 and 2004 as the stock market rallied.
As The Journal pointed out, CRM more than doubled its bet on Citigroup in 2005 as the stock pretty much went nowhere for the year. The firm also reduced its exposure to stronger performers J.P. Morgan Chase
There was also some notable shuffling outside of those big names last year. The firm added Fifth Third Bancorp
Funds with the biggest stakes in banks include Income Fund of America
Other Downtrodden Areas
Just about every area of the large-cap universe--except the energy sector--had some losers last year, and American's bottom-fishing wasn't confined to pharma, media, and banks. It also added to its stakes in S&P 500 laggards Cisco Systems
American Funds took in an estimated $79 billion in net inflows last year, so adding to stock positions was much more common than reducing--and that's true whether you're looking at holdings that trailed or trumped the S&P 500 in 2005. And I don't want to indicate that all of the firm's purchases were losers--it added to huge winners such as Google, Schlumberger
Paul Herbert is a senior analyst with Morningstar.