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Investing Specialists

Filling in the Gaps in Your American Funds Portfolio

Consider small-cap, TIPS, real estate, commodity, and distressed security funds.

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You can do quite well in your investment life only holding American funds, but investors attached to the family may occasionally want to venture away for something that it doesn't offer. After all, its large-cap stock funds are rather similar, its lone small-cap fund leaves something to be desired, and it doesn't run niche funds that stress a single sector or smaller asset class. This month, I'll discuss where you can get exposure to what American lacks. I'll assume American Funds investors work with a full-cost broker and will be limited to funds with loads.

Small-Cap Substitutes
First, investors may very well want to choose a different small-cap fund than  American Funds Smallcap World (SMCWX). This is American's only dedicated small-cap fund, and it has more than $10 billion in assets even after recent market declines. It's global in nature--it probably couldn't be otherwise given its size--and though it's been serviceable, its performance hasn't been stellar: It underperformed the S&P Global < $2 Billion Index for 10 years through March 2008.

Investors would have to replace Smallcap World with two funds, one domestic and one foreign.  Diamond Hill Small Cap (DHSCX) would work well for the domestic option. Veteran manager Tom Schindler leads a talented management team that trades lightly and isn't terribly benchmark-sensitive. The fund's hefty energy exposure will make it a bit volatile as commodity prices gyrate, but we think that the managers make a strong case for why their energy stocks are undervalued. On the foreign side,  Columbia Acorn International Select (LAFAX) fits the bill. At $3 billion, its average market cap indicates that its average firm is more medium-size than small. Manager Chris Olson applies a moderate-growth strategy well, and the fund has outpaced more than 80% of its foreign small/mid-growth peers over the past five years through early April 2009.

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John Coumarianos does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.