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This Core Bond Fund Provides Ballast

Bronze-rated American Funds Bond Fund of America is a good choice for those seeking calm during bouts of market volatility.

The following is our latest Fund Analyst Report for American Funds Bond Fund of America ABNDX. Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

American Funds Bond Fund of America's hemmed-in profile offers diversification benefits relative to equities, while its substantial process improvements in recent years and low fees give it a competitive edge. It earns a Morningstar Analyst Rating of Bronze.

Capital Group used the fund's financial-crisis struggles as impetus to improve its fixed-income investment process. In recent years, the fund's investment team has benefited from a strengthened tool kit, including enhanced analytical tools, quantitative-risk systems, research, and better coordination of the team's top-down views. Coinciding with these process improvements was a shuffling of the management roster, retaining long-tenured members such as principal investment officer John Smet for consistency, while acquiring new perspectives from experienced hires, such as comanager Pramod Atluri, who joined from Fidelity in 2016.

The fund's profile is more hemmed-in than it was before the financial crisis, instilling confidence in its capacity to provide ballast during bouts of market volatility. Its below-investment-grade limit was cut in half to 10% following process improvements, for example, and its junk-rated stake sat in the low single digits as of late 2018. Instead of leaning on credit risk, the team has tried to add value through other means, such as modest interest-rate and yield-curve calls. In the second half of 2018, for instance, the team kept the fund's duration modestly longer than either its typical peer or its bogy.

The fund's restrained profile could cause it to lag more-credit-sensitive intermediate-term bond Morningstar Category peers during risk-on markets. But the fund has held up better than most when riskier fare has struggled, such as during the commodity-related high-yield sell-off from June 2015 through February 2016. And although lower-quality credit has outperformed better-quality sectors for much of 2018, this fund's R6 shares lost 1.4%, less than both its typical distinct competitor and its Bloomberg Barclays U.S. Aggregate Bond Index benchmark, demonstrating the approach's versatility.

Process Pillar:

Positive | Emory Zink 12/14/2018

Coordinated resources across the firm, strengthened by innovative tools and integrated risk management, underpin this fund's Positive Process Pillar rating.

Each comanager takes responsibility for an individual sleeve of the portfolio that corresponds to his expertise: David Betanzos and Fergus MacDonald focus on mortgages; David Lee specializes in corporate credit; and David Hoag, Rob Neithart, and Pramod Atluri serve as generalists. As the fund's principal investment officer, John Smet monitors aggregate exposures at the fund level, incorporating feedback from the firm's risk and quantitative solutions team to make necessary adjustments. The seven managers regularly consult with the team's 30-plus corps of research analysts and two dozen traders to generate views on valuations and fundamentals across subsectors.

Recent improvements in data and resources across Capital Group's fixed-income platform have strengthened this fund's tool kit, including the adoption of analytics platform Aladdin and the development and use of proprietary risk dashboards. More-robust research coordination, as evidenced by the portfolio strategy group--a policy cohort with rotating membership that provides broad macroeconomic guidance across the firm's suite of funds--further instills confidence that the firm is evolving in a positive direction.

The fund's profile is more hemmed-in than in years' past, instilling confidence in its capacity to provide ballast during bouts of equity and credit market volatility. For example, the fund's credit quality skews more conservative, and as of September 2018, it held around 10 percentage points more in securities rated A or higher than its median intermediate-bond peer. A decade prior, the fund had the flexibility to hold up to 20% in non-investment-grade debt, but as leadership embraced a more conservative mantra for the portfolio, that limit came down to 10%, and the fund's junk-rated stake sat in the low single digits as of late 2018.

Over the year ended September 2018, the fund derisked as opportunities arose, trading up in quality and rotating out of credit-sensitive subsectors. For example, while corporate-credit holdings sat at around 30% throughout the year, the fund's energy allocation decreased around 2 percentage points to 3.3%, given uncertainty around oil prices, while the banking allocation increased a full percentage point to 5.8%, rooted in the security-specific recommendations of analysts. Additionally, the fund increased its exposure to U.S. Treasuries and Treasury Inflation-Protected Securities, which sat at a trailing decade high of 40% by the end of the third quarter. The team keeps the fund's duration within a year of the Aggregate Index's; it sat at 6.1 years as of September 2018 versus its bogy's 5.9 years.

Performance Pillar:

Neutral | Emory Zink 12/14/2018

Following significant adjustments to the fund's resources, as well as a more conservative tack in positioning, the fund has performed in line with expectations. Some of these changes are still recent, however, and it will take some time to assess their impact over the long term, supporting a Neutral Performance Pillar rating.

While the fund's previous credit-sensitive profile stung during the financial crisis, the firm's subsequent adjustments to the team's resources and process have resulted in an intentionally more conservative bent in the fund's positioning. That restrained profile has performed as expected, holding up better versus the category median (distinct funds) during the commodity-related high-yield sell-off from June 2015 through February 2016, for instance, while falling just behind when Treasury yields rose from July through December 2016. Despite the risk-on fervor of 2016 and 2017--an environment that places this fund at a disadvantage--the fund kept pace with the category median and edged out its bogy.

Although lower-quality credit has outperformed for much of 2018, as rising yields took a toll on U.S. government-heavy portfolios, this fund's R6 shares lost 1.4%, less than both its typical distinct competitor and its Aggregate Index benchmark, demonstrating the versatility of the fund's improved process.

People Pillar:

Neutral | Emory Zink 12/14/2018

Over half of this team's seven-manager roster has been with the fund for less than four years, and while seasoned members provide some consistency to the effort, the collaboration remains relatively new and untested, which supports a Neutral People Pillar rating.

Principal investment officer John Smet has served on this fund for nearly three decades. David Hoag and Robert Neithart, also long-tenured fixed-income contributors at the firm, joined Smet here in early 2009 and provide generalist and global perspectives, respectively. Within the past five years, four other long-tenured portfolio managers departed but remain at the firm focusing on other projects, while a fifth retired in late 2017. They were replaced with a fresh cadre of leadership, beginning with Fergus MacDonald and David Lee in late 2015, Pramod Atluri in early 2016, and David Betanzos in mid-2016. MacDonald and Betanzos specialize in mortgage and other securitized products. Lee focuses on corporate credit, and Atluri, who joined from Fidelity in 2016 where he had comanaged a number of core funds, provides another generalist perspective. MacDonald and Atluri also serve on the firm's fixed-income portfolio strategy group. The fund benefits from broad firm resources, which include over 30 research analysts, a dedicated quantitative and risk group, and roughly two dozen traders.

Parent Pillar:

Positive | 02/28/2018

As a standard-bearer in asset management, Capital Group earns a Positive Parent rating. Widely known in the U.S. for its American Funds open-end lineup, the active manager boasts some of the industry's more reliable equity and allocation offerings. The firm's multimanager system is key to its success. Dividing each fund into independently run sleeves lets managers invest in line with their styles, enhancing diversification and reducing the overall portfolio's volatility. The funds' analyst-led research portfolios help develop the next generation and recruit top talent with the promise of running money from the start. The result is an investment culture marked by lengthy tenures, strong manager fund ownership, and competitive long-term records.

Capital Group has improved its fixed-income approach through greater coordination, external hires, and enhanced risk management. The firm now has the tools to compete with best-in-class fixed-income shops, though its investment professionals could become more seasoned in their use.

Investors have shown renewed interest in American Funds amid the firm's efforts to expand in Europe, Australia, and Asia. The potential for these investors to pour money into the same strategies should incline Capital Group to clarify what would cause it to close a strategy to protect current shareholders, something the firm has said it would be willing to do.

Price Pillar:

Positive | Emory Zink 12/14/2018

The vast majority of the fund's assets sit in share classes priced low relative to similarly distributed peers. Of note, the fund’s A shares occupy around half of assets and levy a 61-basis-point fee, excluding certain investment-related expenses, that is one of the lowest levies relative to other front-load competitors. Its R6 shares occupy around 20% of assets and levy a 25-basis-point fee, excluding certain investment-related expenses, that is also one of the lowest for an actively managed core bond fund. With its straightforward and hemmed-in profile, low fees better enable management to produce competitive returns versus peers without taking on unnecessary risks, earning the fund a Positive Price rating.

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