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Investing Specialists

Some American Funds Insiders Said Size Was a Problem

Lawsuit evidence shows some portfolio counselors voiced concerns in a 2004 internal survey, but the funds' strong performance is hard to fault.

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Some Morningstar analysts, including me, have long speculated that the billions in American's funds are more of a minus than a plus. An internal survey that American Funds parent Capital Research and Management gave to its employees, including portfolio counselors and analysts, in late 2004 revealed that there has been internal debate about the size issue and that many of American's own employees at that time thought the firm's size was a problem.

The Court Case and the Survey
Portions of the employee survey were released as part of an excessive fee suit (In re American Mutual Funds Fee Litigation (C.D. Cal. 2009)) brought against Capital Research and Management Company, advisor to the American Funds. On Dec. 28, 2009, Capital Research won a decision in federal district court. District Court Judge Gary Feess sided with Capital Research, indicating that the plaintiffs didn't meet the burden of proof.

During the trial, the plaintiff's counsel submitted evidence from the survey. Of course, as lawyers for the plaintiffs, it was their job to diminish Capital's credibility, so they submitted a raft of damning quotes. Still, the quotes show that at least some of the firm's portfolio counselors were concerned about the funds' size.

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