American, Vanguard, and Fidelity Soak up the Cash

What happens when you follow a brutal bear market with a sweeping fund industry scandal? You get an epic flight to quality. Those who think that investors and advisors haven’t been bothered by the bear market or the scandal haven’t been watching fund asset flows.

The latest report from Financial Research Corporation shows a remarkably lopsided marketplace. I divided the 25 largest fund companies into two camps: those tainted by the fund scandal and those that escaped unsullied. The tainted fund firms have suffered $21 billion in redemptions through May. The untarnished companies have hauled in $125 billion in net inflows. See if you can spot the pattern.

If you look at where the money is going within the scandal-free shops, just a handful are sucking up all the cash. American Funds ($44 billion), Vanguard ($32 billion), Barclays ($19 billion), Fidelity ($11 billion), Dodge & Cox ($9 billion), and T. Rowe Price ($8 billion), account for almost the entire $125 billion in inflows. Therein lies investors’ dilemma: You’ve figured out who some of the best, most ethical firms are, but so has everyone else.

Check out some of the asset figures:  Fidelity Low-Priced Stock (FLPSX) is a $30 billion small-cap fund.  American Funds Growth Fund of America (AGTHX) has $79 billion. Both are great funds, but they face the Herculean task of producing strong returns with massive asset bases.

Your next challenge as an investor is to find places that still have lots of room to grow, yet have the integrity and quality of management that everyone is going to Vanguard and American for.

It often pays to go where the crowds aren’t. If you’re looking for funds that can outperform, then it’s a good idea to do a little extra work to uncover one of the many good firms that aren’t yet awash in cash. In my own portfolio, I own a mix of boutique funds and those from Vanguard, Fidelity, and American.

There aren’t many big firms that qualify as solid, undiscovered fund families, but American Century is worth a look. The shop has barely taken in any inflows in recent years, yet it has a strong, stable of stock and bond funds.

The good news is that there are plenty of smaller firms that hold appeal. There is Institutional Capital’s ICAP funds, Sound Shore (which has just  one fund), Bridgeway, FPA, and bond specialists Western Asset.

These boutique firms have had tremendous stability in the management ranks, so you should be able to buy and hold for quite a while. If you’ve got a lot of money with giants such as American and Fidelity, these smaller shops offer appealing diversification and some qualities you can’t get from the giants.