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American Funds' Quietly Effective Bond Funds

We survey the bond-fund landscape at American to find some winners.

Paul Herbert, 05/22/2006

Below is an article from the March 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 of our Fund Family Report on American Funds, click here. Fund Family Reports on Vanguard and Fidelity Funds are also available.

Although few shops are more well-known among mutual fund investors, it's clear that American Funds is not the first name that comes to mind when it's time to buy a bond fund. But while its lineup may not have the complicated strategies that PIMCO offers or the ultralow costs that Vanguard features (or the broad array of options that each shop brings forward), American has enough strong points to make it worth your time to consider fitting one or more of its bond mutual funds into any portfolio.

Slim Lineup

The bigger shops build their lineups with the goal of being all things to all people. This emphasis probably comes from the fact that they cater to institutional clients, organizations that may demand products for more-narrowly focused needs, such as absolute-return or asset-liability matching strategies.

With American, which is more focused on retail investors, you get a rather svelte collection of five taxable-bond mutual funds and six tax-free funds. On the taxable side, for example, your choices include a government-securities fund, two general investment-grade funds, a high-yield fund, and a world-bond fund. On the muni side, the choices are three single-state funds--for investors in California, Virginia, and Maryland--two general muni funds, and a high-yield muni fund.

I don't view this limited assortment of funds as a drawback. True, investors who want to spice up a portfolio with a TIPS fund or a bank-loan fund will have to go elsewhere. But most investors probably need just one or two fixed-income funds to help them meet income and stability goals. Besides, it appears to me that American is sticking with what it does best. Nine of the shop's 11 funds boast 10-year trailing returns that top the gains of the median funds in their Morningstar categories.

Emphasis on Credit Research

Just like on the stock side at American Funds, and consistent with the firm's belief in in-house research, a broad team of managers, analysts, and traders supports the bond funds. In fact, an organizational chart from Capital Research & Management's fixed-income effort looks a lot like those you'll see from much larger fixed-income specialists, with a small army of folks divided into groups along sector lines.

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