Does American Funds Growth Fund of America’s Measured Approach Still Have Merit?

Key Morningstar Metrics for American Funds Growth Fund of America

• Morningstar Medalist Rating: Bronze
• Process Pillar: Average
• People Pillar: Above Average
• Parent Pillar: High

American Funds Growth Fund of America’s AGTHX experienced managers are more than capable, but the fund’s size limits their impact. It remains a decent option at the right price.

This capital appreciation strategy aims to offer broad diversification, which can make it hard to place. All three of the firm’s equity subsidiaries contribute, divvying up allocations into smaller, independent sleeves under its characteristic multimanager approach. The managers look to diversify across sectors and companies and can invest in overseas companies that derive notable revenue from the United States. In the pursuit of growth, it stands out from its prospectus benchmark, the S&P 500. Yet, as of December 2023, the strategy wasn’t as top-heavy and chock-full of technology companies as the Russell 1000 Growth Index, and its roughly 10% stake in non-US stocks ranked in the highest quintile of large-growth Morningstar Category peers.

Its sprawling asset base of roughly $250 billion requires some maneuvering. After a handful of lineup changes in 2023, 13 named managers run individual sleeves. That is one of the largest management teams at the firm, and while it helps produce a diffuse portfolio of holdings, that can be a headwind at times if not enough managers buy into a particular company. For example, after a positive meeting with management at the end of 2022, several managers at the firm bought Nvidia NVDA. Yet, only three of the 13 managers here owned it as of the first quarter of 2023. This led the strategy to be underweight relative to the index, which weighed on results in 2023.

The team hasn’t led the strategy to competitive results for several years running. During the decade ended in January 2024, the A shares’ 12.3% annualized gain lagged the growth index’s 15.5% and the S&P 500′s 12.6%. Some of the managers’ decisions during this time frame, including the portfolio’s underweighting in technology stocks and the market’s largest companies as well as an outsize stake in non-US stocks, have weighed on relative results.

Despite the strategy’s challenges, its measured growth approach has worked well at times, including during the dot-com bubble, the 2007-09 global financial crisis, and the early 2020 coronavirus drawdown. It remains a reasonable option for patient investors.

Performance Highlights

The strategy’s mix of traditional growth names, turnaround plays, and cyclical stocks has led to outperformance over long stretches. Since longest-serving manager Donald O’Neal joined the management team in November 1993, the A shares’ 11.2% annualized gain through January 2024 bested the S&P 500′s 10.1% (its broad-market prospectus benchmark) and the Russell 1000 Growth’s 10.6% (the large-growth category’s index).

The strategy had an impressive run in the early to mid-2000s when a smaller asset base gave it more flexibility to invest meaningfully in mid-cap stocks. Including value-oriented managers and international names worked in its favor then, too. Massive inflows followed, and the strategy’s asset base topped $200 billion in October 2007. It held up relatively well in the 2007-09 financial crisis.

Yet, the strategy didn’t keep pace in the postcrisis bull market. Since the March 9, 2009, bottom, the strategy’s 15.5% annualized gain through January 2024 trailed the S&P 500′s 16.3% and the Russell 1000 Growth Index’s 18.4%. Its measured growth approach hasn’t worked as the market has favored style-pure US growth names.

The emphasis on large firms with broad market exposure has given the strategy resilience in many down markets relative to the large-growth index. That includes 2020′s coronavirus-driven bear market. However, it lost more than both indexes in 2022. The strategy bounced back in 2023, outperforming the category and S&P 500, but it lagged the growth index, as underweighting giant-cap tech companies such as Nvidia hurt.