Downgrade for This American Funds Strategy as Team Structure Warrants Caution

A behemoth asset base of around $210 billion demands skillful maneuvering from the team behind American Funds Growth Fund of America’s AGTHX. Despite experience and abundant resources, the management team has inconsistently wrangled this hulking strategy, resulting in a People Pillar downgrade to Above Average from High in March. This dropped the cheapest shares to a Morningstar Analyst Rating of Bronze from Silver, and the more-expensive ones to Neutral.

As the biggest active fund in the U.S. fund large-growth Morningstar Category, the strategy takes on a wide variety of investment opportunities. These range from traditional growth stocks to more unique selections, all of them with long-term views. The allocation brings considerable exposure to the Russell 1000 Growth Index, but the team is free to adjust from it by leaning into non-U.S. assets, or by under- or overweighting particular sectors. A broad investment universe means this fund can go into many areas, resulting in a fairly diversified portfolio. However, the impact of individual components can be heavily muted under the sheer size of the fund.

The median of each sleeve sits around $9 billion, and the strategy caps ownership of outstanding shares at any single firm at 9.5%. Due to those limits and the number of sleeves, the weightings are quickly diluted as the portfolio is stitched together. The result includes roughly 400 stocks across a variety of market sectors. The firm’s research guides sector positioning and can deviate considerably from the Russell 1000 Growth Index. As an example, tech exposure was kept underweight to that index for the last five years, sitting at more than 20 percentage points below those of the benchmark at the end of 2022.

The fund’s assets are divided among three subsidiaries of American Funds’ parent, Capital Group, each with a dedicated management team. With over a dozen named managers and three analyst teams to support multiple portfolio sleeves, a lot of voices drive the strategy. An additional undisclosed cohort of managers oversees a remaining 22% of the assets. This results in a very broad team, with potentially competing investment perspectives, trying to shape a massive strategy.

Given the size of the fund, the breadth of the team, and the large number of unnamed managers contributing, there is uncertainty about the team’s identity and contributions individuals are making. Since 2020, four managers have departed the cohort, further stoking concern. Over the trailing 10 years ended March 2023, the 11.8% annualized return of the strategy’s A share class trailed the Russell 1000 Growth Index, the S&P 500, and its typical U.S. fund large growth category peer, weighed down by lower exposures to technology stocks and higher allocations to non-U.S. equity. The team is certainly skilled and applies a sensible approach, but it is unclear how its many voices coalesce into a clear and consistent path for the fund.

New to Coverage

AMG River Road Small Cap Value ARSIX earned an initial Bronze rating across all share classes in March, sporting an experienced team with a sensibly defensive approach. Its leading managers bring a cumulative 40 years of industry experience, constructing a small-cap portfolio that rides the line between value and blend. Fundamental research and skill guide the portfolio, providing admirable downside protection. The strategy’s institutional share class returned 6.7% annualized since its December 2006 inception through March.

Ratings Roundup

Morningstar updated the Analyst Ratings for 1,164 fund share classes, exchange-traded funds, separately managed accounts, collective investment trusts, and model portfolios last month. Of these, 894 maintained their previous rating, 34 earned upgrades, 95 received downgrades, 106 were new to coverage, and 35 went under review owing to material changes such as manager departures or subadvisor switches. Looking through share classes and vehicles to their underlying strategies, Morningstar issued 325 Analyst Ratings throughout March. Of these, 16 were new to coverage. While six strategies received upgrades and 21 received downgrades, the majority (274) maintained their previous ratings.