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Changes Afoot at Capital Group and American Funds

Recent developments mean good news for the firms' institutional clients.

Morningstar Fund Analysts, 03/21/2013

Capital Group, the parent company to American Funds, recently announced a series of changes designed to mitigate branding confusion while also shoring up the firm's institutional business. The firm is reorganizing its sales and services teams, with clients now interacting with a single point of contact versus multiple ones that were previously organized by distribution channels. Capital also unveiled a new branding plan, consolidating numerous sister company monikers in favor of just two: Capital Group and American Funds by Capital Group.

The changes are more noteworthy for Capital's institutional clients than for its mutual fund investors, as the changes appear to be partly driven by performance challenges and outflows in the firm's institutional business. That's largely apparent in the firm's reorganization of its equity investment teams, a process first started in mid-2012 (and covered last summer in a Fund Times article you can view here). Whereas the firm's mutual fund and institutional accounts have been split into legally distinct and independent entities since 1998, that hard-line distinction will go away.

While Capital's mutual fund and institutional equity teams were producing research independently from one another, the strengths conferred by their common organizational culture--including Capital's long-term investing orientation and highly stable and experienced investment professionals--theoretically should have resulted in investment teams with comparable skills. Results of similar strategies across various offerings have sometimes left room for doubt, though. For example, while American Funds Growth Fund of America AGTHX has an annualized 3.5% gain over the last five years through the end of February 2013, the large-growth Capital Guardian U.S. Equity separate account strategy gained only 1.0% over the same time period, even with the advantage of lower fees.

Institutional investors now will be able to access mutual fund strategies (and their investment teams) through separate accounts and collective investment trusts. To facilitate this, the firm has continued to shuffle a few of its portfolio managers and analysts between the equity teams. Managers for a few of the mutual funds now draw their investment ideas from the team previously dedicated to institutional mandates.

These changes occur following years of substantial asset outflows; investors pulled out $62 billion in mutual fund assets in 2012, for example, and there have been numerous high-profile client defections that particularly have affected the firm's institutional business. By many accounts, the investment teams remain unruffled by those flows, and their strong culture helped to ensure that things remained business as usual. But these changes suggest that even Capital can be swayed to adapt in the face of a declining institutional business and weak performance. 

Putnam Broadens Fund Lineup
Putnam Investments is expanding its mutual fund lineup. The Boston-based firm announced that it will launch six new funds: Putnam Low Volatility Equity PLVEX, Putnam Strategic Volatility Equity PSVEX, Putnam Global Dividend PGDEX, Putnam Emerging Markets Income PEMWX, Putnam Short-Term Municipal Income PSMEX, and Putnam Intermediate-Term Municipal Income PIMEX. Some of the launches reflect a familiar trend of Putnam bringing to the retail market strategies that have been running in institutional or other accounts. For example, Global Dividend manager Darren Jaroch will implement a strategy that largely mirrors the one he runs that is sold to Japanese clients. (Jaroch also manages Putnam Equity Income PEYAX.) Meanwhile, Low Volatility Equity mimics an equity sleeve within the Putnam Absolute Return 500 PJMDX and 700 PDMAX funds. Putnam has launched more than two dozen funds since CEO Bob Reynolds took over in mid-2008.

JPMorgan Value Funds to Merge
JPMorgan is planning to merge JPMorgan Value Opportunities JVOIX into JPMorgan Large Cap Value HLQVX, pending the approval of Value Opportunities' shareholders. The merger makes sense. While the funds have different histories, both have been run by Aryeh Glatter using the same strategy since 2011 and the portfolios are virtually identical. While each fund on its own has more than $600 million in assets, a combined asset base would not be excessive given Glatter's large-cap focus.

Value Opportunities shareholders will receive Large Cap Value shares of the same class. (Institutional shareholders will receive R5 shares.) While the acquired class has lower net expenses than the acquiring class, JPMorgan will maintain the net expense level in effect prior to the merger until Oct. 31, 2014.

Artio Emerging-Markets Local Debt Fund to Liquidate
Artio Emerging Markets Local Debt AEFAX will liquidate on April 19, 2013. The fund has just $25 million in assets. This announcement follows news of Aberdeen's acquisition of Artio, possibly indicating that Artio is cleaning house before the acquisition is complete.

New Manager on Nuveen Large-Cap Growth Fund
Patrick Burton will replace R. Bart Wear as a portfolio manager on Nuveen Winslow Large-Cap Growth NWCAX. Burton has been a managing director and analyst at subadvisor Winslow Capital Management since 2010. Clark Winslow and Justin Kelly will continue to serve as portfolio managers of the fund.

BlackRock to Merge Two S&P 500 Index Funds
BlackRock S&P 500 Index MASRX will merge into BlackRock S&P 500 Stock WFSPX. Oddly, BlackRock S&P 500 Index is a bigger fund than BlackRock S&P 500 Stock; the former has more than $2.0 billion in assets under management, compared with $430.5 million in BlackRock S&P 500 Stock. However, BlackRock S&P 500 Stock has a lower expense ratio than both share classes of BlackRock S&P 500 Index.

PIMCO Fund Name Change
PIMCO Worldwide Fundamental Advantage TR Strategy PWWIX will change its name to PIMCO Worldwide Fundamental Advantage AR Strategy. Also, the fund will change from a "total return" strategy to an "absolute return" strategy, which has more flexibility with sector exposures, non-U.S. exposures, and credit quality.

Manager Shuffle at Thrivent
Kurt Lauber replaced Matthew Finn as portfolio manager of Thrivent Large Cap Value AAUTX, and Matthew Finn replaced Darren Bagwell at Thrivent Small Cap Stock AASMX. Lauber, who most recently had been an associate portfolio manager at Thrivent, was an analyst at American Express Financial Advisors and UBS Global Asset Management before joining the firm in 2004. Finn also joined Thrivent in 2004.

Senior fund analysts Laura Lallos, Kevin McDevitt, and Janet Yang and fund analysts Robert Goldsborough, Kailin Liu, and Rob Wherry contributed to this report.

Morningstar fund analysts cover more than 1,700 mutual funds and write regular commentary covering fund industry news, fund investing trends, picks, portfolio planning, international investing, and more.

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