Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Active mutual funds have been losing ground to passive, but American Funds is not going to go quietly. Joining me to discuss recent developments at the firm is Alec Lucas. He is a senior analyst with Morningstar.
Alec, thank you so much for being here.
Alec Lucas: Thanks for having me.
Benz: Alec, let's discuss fund flows. American Funds was a firm that we had been watching, certainly early into this market recovery. It had been losing assets, but it has staged a little bit of a rebound. Some of the funds have been garnering new flows. Let's talk about flow trends at the firm.
Lucas: They are doing very well for an active manager. They had some outflows in 2016 and then rebounded well in 2017. More than $17 billion in new money has come into the firm. For active managers that's very good. It ranks just behind DFA and PIMCO. They are strong on that standpoint, but certainly, they are far from where they were in the early 2000s. 2004, for example, they had more than $80 billion come into the firm. It's pretty clear that they are taking steps to combat that by, for example, expanding their lineup overseas by offering what they are calling a vehicle flexible approach.
Benz: What does that mean?
Lucas: The way that we like to talk about it is it's a replication of their U.S.-based strategies. They replicate these strategies overseas and offer them to non-U.S.-based investors. It's a way to leverage their core strengths and capabilities. To the extent that it's a concern for U.S. investors, it would simply be that that's more money pouring into strategies, and of course, the funds are already quite big.
Benz: When the funds were growing very rapidly, that was a concern of ours, that there could be some risks to having too much in assets at some of the funds. Is that a concern of yours?
Lucas: It's certainly something that we are keeping close watch on. They have their multimanager system where they divide the fund's asset base into individually managed sleeves. Something that we don't always talk about though is that they have also divided their equity operations into three subsidiaries. On their bigger funds like Growth Fund of America, it's actually split between two separate subsidiaries who make their own independent investment decisions. Given the size of their funds, they definitely manage their scale well. That said, there is a limit to the amount of assets that can be managed …
Benz: At any firm, right?
Lucas: Yeah, and that's an ongoing discussion that we have with them about that.
Benz: One thing that I know we have been talking about is this idea of American Funds and other formerly load shops now actually being available, having their funds available on no-load supermarket platforms. Let's talk about that, the F-1 share class.
Lucas: American Funds has their F-1 share classes. Those are no-load. They do include a 25-basis-point 12b-1 fee for distribution. But even with that tact on, they tend to be below average relative to actively managed peers of similar distribution, and those F-1 no-load shares are now available on Fidelity, Schwab, TD Ameritrade, and E-Trade. If you are a do-it-yourself no-load investor and you have always wanted American Funds but for the load, well, now you have that as an option.
Benz: American Funds, I know, we have always liked their equity lineup, liked their sort of allocation lineup. But now, we are warming up to their core fixed-income lineup as well. The big, flagship fixed-income fund got an upgrade recently.
Lucas: Bond Fund of America just yesterday was upgraded from Neutral to Bronze. Emory Zink is the analyst on that fund, and she has been paying close attention to their fixed-income operations. They have invested a lot of energy and resources into those operations. They have made experienced hires. Pramod Atluri is a generalist hired from Fidelity that works on that fund. We think that the prospects of that fund to deliver very competitive results for investors are strong going forward, and so it was upgraded to Bronze.
Benz: Let's talk about performance. 2017 has been a great year for equity investors. Some American Funds have performed very, very well in this environment. Let's talk about some of the stellar performers in absolute as well as in relative terms.
Lucas: Washington Mutual is a conservative fund and this is an environment that's been, obviously, a strong market rally. But that fund has done very well. It's benefited from a position in Boeing, for example. New Economy is a fund that's virtually global in its orientation, tends to have a lot of emerging markets …
Benz: Which has helped this year.
Lucas: Yes, exactly. But it's always had that focus and it maintains that through thick and thin, and this has been a very good year for it. Some other funds that have done well, New Perspective has rebounded. It was Fund Manager of the Year in 2015, struggled a bit in 2016, but has rebounded very well in 2017. Fundamental Investors has done well. That's a very good fund, Gold-rated. It's been a good year across the board.
One fund that's struggled this year in relative terms is AMCAP, but it's returned more than 20%, and it's a more conservatively oriented growth fund, a multicap in its orientation. A strong year overall for American Funds.
Benz: Anytime you have such a strong year, I think it's reasonable for investors to think about what could lie ahead and certainly U.S. equity valuations are not cheap today. Let's talk about that. How do you expect American Funds to behave on the downside? And of course, it's a broad basket with lots of different strategies, but would you say that you expect them to hold up a bit better than peers in a sustained market downturn?
Lucas: Our expectation is that their lineup would fare well in tumultuous conditions. That was certainly the case in the 2000's bear market and it was also the case in the financial crisis to a large extent, but not to the same extent in the early 2000s. The firm has a long history and it's tended to do very well in down markets. Our expectation is that that's likely to be the case again. I think that if you are an investor who is worried market valuations and is worried about trying to time the market, you want to stay in equities, then you've got very good conservatively oriented options at American Funds. Washington Mutual is one.
Benz: So, just a conservative strategy from the get go?
Lucas: These are dividend-oriented strategies. You've got very experienced managers. Their multimanager system helps with succession. Fees are low. It's a very good option. And again, it's now available to investors through no-load F-1 shares.
Benz: Alec, thank you so much for being here to discuss these trends.
Lucas: Thanks for having me.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.