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Five Suggestions for American Funds' Directors

How the funds' trustees could be fighting harder for shareholders.

Paul Herbert, 04/10/2006

Below is an excerpt from the February issue of the Morningstar Fund Family Report on American Funds. To review a risk-free trial issue, click here. Fund Family Reports on Fidelity and Vanguard are also available.

Like public companies, every mutual fund has a board of directors charged with looking after shareholders' best interests. In the aftermath of the fund-trading scandal, it became clear that some boards might not have been taking their duties seriously enough.

I've looked at the trustees of the American funds, and overall, I have a favorable opinion of the job they're doing. For one, there are different boards for the respective funds, so in general each member oversees a manageable number of investments. And, as of 2005, each fund has an independent chairperson, which, in principle at least, lessens the influence that the fund firm has over the board's thinking.

So as far as director quality goes, I think investors in the American funds have gotten a pretty good deal. I still think the boards could be fighting even harder for shareholders, though, and below I've laid out some suggestions as to how they could do so.

1. Get Serious About Asset Size

It will come as no surprise to regular readers that I'm taking up this matter first. I've written much about asset size at American, but with the unprecedented rapid growth and large sizes of many of the funds, I would be derelict in my duty as a mutual fund analyst if I didn't bring it to the boards' attention. The boards have discretion to close the funds and should bear responsibility if they falter as a result of their girth.

American Funds Growth Fund of America's AGTHX board indicated in the fund's most recent annual report that in reviewing Capital Research and Management's advisory contract, it considered "the ability of its organizational structure to address the recent growth in assets under management."

But I think the trustees of Growth Fund of America and other bulging funds should further inform shareholders of the specific metrics it has looked at to conclude that all's well on the size front. For instance, has the board looked at the individual portfolios that make up each fund and determined whether they are at or near capacity? Has the board evaluated whether any of the portfolio counselors on the fund is overextended when her or his responsibilities at other funds are taken into account? Has it contracted with outside sources to study the impact of a fund's trades on its performance? It's hard to tell from the statement above whether this important work has been carried out.

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