American Funds Mortgage Fund® Class F-1 MFAEX

Capital Group announced that comanager David Betanzos will retire from American Funds Mortgage and the firm effective Dec. 1, 2026. This news does not affect the strategy’s High People and Above Average Process Pillar ratings or its Morningstar Medalist Ratings across share classes.

A Capital Group veteran of more than two decades, Betanzos has served as a named manager on the strategy since 2013. Consistent with Capital Group’s multimanager approach, Betanzos oversees a sleeve of the strategy’s USD 13 billion portfolio, combining Treasuries and agency mortgage-backed securities. The ample lead time of this retirement announcement to ensure a smooth transition and strong supporting resources don’t dent our confidence in this team.

The remaining managers will stay in place, with principal investment officer Fergus MacDonald continuing to lead the strategy. MacDonald and comanagers Oliver Edmonds and Pratyoosh Pratyoosh will absorb Betanzos’ sleeve. Pratyoosh will likely assume a larger allocation than the 15% of assets he managed as of March 2026. An agency mortgage-backed securities specialist, Pratyoosh became a named comanager in November 2025 and currently oversees a smaller sleeve than the other managers. Although he is relatively new as a named manager on this strategy, he has managed portfolios since 2023 as part of the research-managed sleeve.

American Funds Mortgage’s experienced team and flexible approach have helped it navigate market drawdowns effectively, making it an excellent option.

The strategy benefits from a group of veteran managers, who each manage a sleeve of the portfolio alongside an analyst-led research portfolio. Fergus MacDonald has managed a sleeve of the fund since its inception in 2010 and became the principal investment officer responsible for overseeing aggregate fund-level exposures in early 2021. He assumed that role from David Betanzos, who remains on the team and has managed a sleeve of the portfolio since 2013. Oliver Edmonds became a named manager in late 2019 after spending over two decades at Capital Group. The management team’s newest addition is Pratyoosh Pratyoosh, whom the firm named as a manager officially in November 2025 after he previously worked on the research portfolio sleeve and served as the strategy’s agency mortgage-backed securities analyst. His quantitatively driven approach to MBS investing rounds out the other three managers’ more macro-oriented philosophy.

The strategy centers on tactically allocating among different agency MBS structures, including specified pools and forward-contract mortgage TBAs, with the latter providing liquidity and allowing the team to more easily adjust exposures as valuations and market conditions evolve. The team's willingness to use that flexibility distinguishes it from many peers in the government mortgage-backed bond Morningstar Category. The team recently gained the ability to add a net asset value equivalent of up to 20% in economic leverage, giving it another tool to add value and allowing it to overweight MBS relative to its Bloomberg US MBS Index when valuations are attractive, though that can add volatility, as well.

The fund’s valuation-driven approach can prompt sizable shifts in its overall MBS exposure over short periods as MBS spreads versus Treasuries widen or tighten. For instance, the managers reduced the fund’s mortgage exposure to 78% at year-end 2025 from 90% in March 2024, while increasing cash and equivalents because they viewed mortgages as expensive and preferred to hold cash until more attractive opportunities emerged.

The fund’s excellent downside protection has supported a strong long-term performance. The R6 shares’ 1.77% annualized return over the trailing 10 years through March 2026 ranked in the category’s top quartile and outpaced the benchmark by 33 basis points. It also topped 70% of peers in seven of eight equity drawdowns since 2015. Shorter-term results were choppier, however, as a mistimed curve-steepening bet hurt in 2023 and 2024 before a rebound in 2025.

The strategy’s flexible approach to agency mortgage-backed securities centers on downside protection and relative value, which has supported resilience during volatile periods. It earns an Above Average Process rating.

The fund’s four named managers and analyst-driven research platform focus mainly on agency MBS, including specified pools and highly liquid forward contract mortgage TBAs. This liquidity lets the team tactically adjust the portfolio’s agency MBS stake and shift in or out of Treasuries based on market conditions and relative value opportunities. It uses that flexibility with more conviction than most peers in the government mortgage-backed bond category, raising the mortgage allocation to around 90% of assets when spreads widen and trimming it to roughly 50% when valuations tighten.

The team avoids complex mortgage derivatives and has historically capped exposure to higher-quality nongovernment securitized debt at roughly 5%, which has helped limit drawdowns during stressed markets. The strategy also now has the ability to add economic leverage of up to 20% of net asset value by investing the cash backing its TBA contracts in higher-yielding agency TBAs. This process change enables the team to overweight agency MBS relative to its Bloomberg US MBS Index, which is fully invested in MBS, when valuations are attractive, though doing so can increase volatility. The team has yet to exercise that option since receiving approval.

When agency MBS valuation appears rich, the managers turn to FNMA, FHLMC, and Federal Home Loan Bank debentures and discount notes to maintain housing-related exposure above 80%, consistent with a broad interpretation of the fund’s mortgage mandate. This was especially noteworthy in 2024, when agency debt rose to 6.5% of the portfolio. Although such agency debt carries minimal credit risk, it does not offer the collateral backing of an underlying mortgage pool that supports MBS.

The fund’s valuation-driven approach can lead to sizable shifts in MBS exposure over relatively short periods, largely in line with the widening and tightening of MBS yield spreads versus Treasuries. For example, that allocation—made up mostly of agency mortgages with some higher-rated nonagency MBS—rose to 88% of assets in June 2020 from 57% in September 2019. The managers leaned into lower-coupon mortgages that benefited from the Federal Reserve’s monthly purchase program while avoiding higher-coupon MBS, which carried greater prepayment risk as interest rates fell sharply. More recently, they trimmed the mortgage stake by 9 percentage points in the second half of 2025, viewing the sector as rich and preferring to hold cash until valuations improved.

The managers can also make meaningful interest rate bets. Although the fund’s duration typically stays within 0.5 years of the Bloomberg US MBS Index, it can use interest rate swaps and Treasury futures to extend or shorten duration by as much as 1.5 years relative to the benchmark. They may also position the portfolio based on their views of changes in the yield curve. As a result, the strategy’s interest rate positioning can at times diverge meaningfully from the benchmark. One of its most notable recent duration calls came in the first quarter of 2021, when the managers positioned the portfolio 1.4 years shorter than the index in anticipation of Fed rate hikes to combat rising inflation. As of December 2025, however, the fund’s 5.5-year duration was modestly longer than both the benchmark’s 5.3 years and the peer median’s 5.4 years.

An experienced and well-balanced group of managers runs this USD 13 billion strategy, the largest active fund in Morningstar's new government mortgage-backed bond category, warranting a High People rating.

Parent firm Capital Group allocates the fund’s assets across its four named managers and an analyst-driven research portfolio. Fergus MacDonald, who has managed a sleeve of the strategy since its late-2010 inception, assumed the role of principal investment officer in early 2021, with responsibility for overseeing aggregate fund-level exposures. He succeeded David Betanzos, who remains on the team and has managed a sleeve since 2013. Oliver Edmonds joined the manager roster in 2019. The management team’s newest addition is Pratyoosh Pratyoosh, whom the firm named as a manager officially in November 2025 after he previously oversaw a small, diversified sleeve of the fund while serving as the strategy’s agency MBS analyst. He currently occupies a hybrid manager-analyst role while the firm works to fill his former analyst position.

The strategy’s four managers oversee their respective sleeves of the portfolio based on their expertise and convictions, while staying within the fund’s mortgage mandate and risk parameters. Pratyoosh’s quantitatively-driven approach to MBS investing complements the other three managers’ more macroeconomically-focused philosophy. Seven securitized analysts support them, including Pratyoosh and one other veteran agency MBS analyst, who oversee the research portfolio. An additional five securitized traders and four interest rate specialists help inform the strategy’s interest-rate positioning and trading execution.

MacDonald holds between USD 100,000 and USD 500,000 of personal investments in the fund, while the other three named managers hold between USD 500,000 and USD 1 million, showing strong alignment with fund investors.

Capital Group stands out from the pack as it enhances capabilities around strong core competencies. It earns a High Parent rating.

Since 1931, Capital Group, parent of American Funds, has thoughtfully built out capabilities to become one of the world’s largest asset managers, managing more than USD 3 trillion dollars. Building on the success of its long-term-oriented, multiple-manager system for global equities, the firm has developed robust fixed-income and multi-asset units, each managing more than USD 500 billion. In January 2026, as part of its periodic review of its now five distinct research organizations, Capital Group implemented changes to its equity investment subsidiaries. This exercise resulted in most equity strategies having at least one portfolio manager change, but according to the firm, it better balances each of Capital Group’s three equity groups in terms of investment breadth and helps the firm better align leadership opportunities across the groups. These kinds of shifts have occurred before, with the last coming in 2018.

Capital Group has also turned its attention to some modern opportunities. To address public/private market convergence trends, it launched in April 2025 two semiliquid funds with private market giant KKR. In keeping with its signature portfolio management approach, it splits those funds into multiple sleeves, which are managed independently by distinct managers at each firm. Capital Group plans to deepen this relationship with target-date and model portfolios, as well as public/private equity funds. On the other end of the spectrum, although the firm is firmly dedicated to active management, it has also acknowledged investor preference for passive investing and has thus partnered with indexing stalwarts Vanguard, BlackRock, and Schwab on active/passive models. Capital Group’s proven investment prowess, strong reputation among investors, and scale mean it can be selective with its partnerships.

In addressing another recent trend, since early 2022, the firm has launched more than 25 active exchange-traded funds globally, most of which are distinct, but several are similar to some of its legacy American Funds mutual funds. Unlike some of its peers, though, it has not filed for SEC exemptive relief to offer ETFs as a share class.

That’s a lot of change for such a storied and sizable firm, but Capital Group has a long history of serving investors well.

The strategy’s long-term track record has been outstanding.

From the fund’s inception in November 2010 through March 2026, its R6 shares gained 2.24% annualized, ranking second among government mortgage-backed bond category peers and outperforming the Bloomberg US MBS Index by 25 basis points. Its risk-adjusted results were also stellar: The fund’s Sharpe ratio ranked second among its peers over the same period.

Consistent with its mandate, the strategy provides excellent downside protection during equity market drawdowns, effectively serving as a ballast within a broader portfolio. That resilience reflects the team’s flexible approach, which allows it to adjust agency MBS exposure drastically as market conditions shift. In the eight drawdowns since 2015 in which the S&P 500 lost more than 10%, the fund outperformed more than 70% of its peers seven of those times. It also landed in the category’s top decile in half of those periods.

That said, the strategy struggled in recent years because of missteps in interest rate positioning before rebounding in 2025. The fund lagged its benchmark by 104 basis points in 2023 and 22 basis points in 2024, largely because its curve-steepening stance—adding to shorter-dated issues while trimming exposure at the long end of the Treasury yield curve—hurt results as the yield curve remained stubbornly flat and at times inverted. Performance rebounded sharply in 2025, when the fund outpaced its benchmark by 31 basis points, aided by its longer-duration posture during a year of Fed rate cuts and solid security selection within agency MBS.

American Funds Mortgage F1's Prospectus Adjusted Expense Ratio is 0.62% per year. It places it in the middle quintile of the Morningstar US Fund Government Mortgage-Backed Bond Category, where the median fee is 0.62% per year. This cost positioning translates into a Medalist Rating Price Score of -0.04, which reflects its relative price positioning within the category. The Price Score ranges from -2.50 (most expensive) to +2.50 (cheapest), with higher scores indicating better cost competitiveness.