American Funds’ devotion to the adviser channel, where it has become known as a safe fund choice, has proven a potent asset-accumulation formula through the recent bear market and into its aftermath.
The Los Angeles company cannot claim to have gone unscathed through the fund trading scandals — a Securities and Exchange Commission investigation became public in June, and investor class actions are pending — but the news did not make a big splash and did not disturb inflows in June.
In terms of long-term mutual fund assets — equity and bond funds — American Funds grew steadily during the 1990s, from $91.5 billion at the end of 1993 to $326.6 billion at Dec. 31, 1999, just before the bear market began. During that time, it essentially kept pace with the companies above it, Fidelity and Vanguard. American Funds and Vanguard plateaued through the bear years, 2000 through 2002, but Fidelity lost substantial ground.
Since the market turned in 2003 and through this June 30, while Fidelity and Vanguard were developing platforms and launching products, American Funds has expanded its long-term fund assets under management by 69.1%, to $549.2 billion, according to Financial Research Corp. During that period it introduced no new products, and it does not offer hedge funds, managed accounts, or any hot alternative product.
By comparison Financial Research reported that during the 18 months through June 30 Fidelity’s long-term fund assets grew 39.4%, to $577 billion, and Vanguard’s 41.1%, to $667.9 billion. Putnam Investments, the first fund company charged in the mutual fund trading scandals, saw its long-term assets under management shrink 11% during this period, to $118.5 billion.
“We don’t have any new initiatives that we are on the verge of introducing or announcing, or that we are even contemplating,” said Chuck Freadhoff, a vice president at American Funds. “We only have 29 funds.”
American Funds does not advertise. It only markets its products to advisers, including banks’ advisers, and has no storefronts or distribution centers.
So how does a company that would rather fly below the radar continue to succeed?
American Funds says it has performed well with a value style of investing that did not try to ride the tech boom in the 1990s — and did not plunge when the bubble burst in 2000. This steady approach appeals to financial advisers, Mr. Freadhoff said, and investors who have chosen a fund with an adviser’s help as part of a long-term plan tend not to bail out when the market turns down.
The company’s momentum is so strong that the announcement in June of the SEC investigation did not cause even a hiccup in its fund inflows. In fact, its asset flow grew to $6 billion in June, from $5.4 billion in May, and its monthly flows have far exceeded those of Fidelity and Vanguard during the period from last September when the fund scandal emerged.
Mr. Freadhoff said the company’s success formula is no mystery.
“We are sold only through financial advisers, and that has helped keep people invested,” Mr. Freadhoff said. “When a financial adviser helps you select a fund that makes sense to you for the right reason, you are more likely to stay with it.”
Performance and penetration have been crucial. According to Morningstar, 20 of American’s 26 equity and fixed-income funds are ranked in the top one-third of their peer groups for the past three and five years. And Tiburon Strategic Advisors says 72% of 1,500 independent advisers surveyed last year have used American Funds.
Burton Greenwald, an investment analyst in Philadelphia, said advisers continue to recommend American Funds because the company has a solid reputation for consistent investment performance.
“American Funds didn’t have a tremendous run-up in the late 1990s and early 2000 when the Nasdaq was booming, so they avoided the implosion of the market,” he said. “Their value-oriented approach has proven consistent over time.”
“They have avoided the fads and fashions and haven’t gone for a slew of funds,” Mr. Greenwald said. “This isn’t a ‘fund of the month’ approach. They focus on long-term value rather than short-term trends. That plays well with advisers.”
Analysts say the company never tries to be a high-flyer. American Funds did not hop on the tech bandwagon during those stocks’ strong run in the late 1990s. But in 2001 and 2002, as the bear market built to a peak, 73% of its funds beat their peers, according to Morningstar, and 80% beat the S&P 500 Index.
“Advisers feel comfortable recommending our funds because the approach is long-term-oriented,” Mr. Freadhoff said. “While we lagged in the late ’90s, we certainly did well in the bear market because we did not take as aggressive a stand as our competitors did.”
“We will not change our approach to investing or to the way we manage money,” he added. “We feel over long periods of time this works for our shareholders.”
The company continues to add assets across its retail channels and through retirement plans. In 2001, it began offering a 529 college savings plan, CollegeAmerica. At the end of 2003, according to Financial Research, American Funds was the top provider of 529 plans, managing $5.3 billion of the product’s $35 billion total industrywide.
Some analysts say that American Funds has succeeded in siphoning assets from fund companies affected by the trading scandals, Mr. Freadhoff said, but the company does not know where new funds are coming from nor whether people are investing with it because they left a company tainted by scandal. He said the scandal “is a focus in the industry. I think financial advisers are asking a lot of questions as part of their due diligence.”
Mr. Greenwald said American Funds could face action by the Securities and Exchange Commission, however. In June, Capital Research and Management Co., which manages the American Funds portfolios, notified some advisers that sell its funds that the SEC is investigating it.
The SEC is examining whether the company awarded additional fees to companies that sold its funds aggressively.
Mr. Freadhoff said the inquiry is continuing and American Funds is trying to “be respectful of the agency investigating us, and we are trying not to speculate.” The company said on its Web site that it is “cooperating fully” with the investigation.
The Web site also said that American Funds and Capital Research and Management have been named in class actions related to market timing and certain sales practices but that “these lawsuits are without merit and will be defended vigorously.” The management and fund companies are subsidiaries of Capital Group Cos. in Los Angeles.
Mr. Freadhoff said American Funds has no unorthodox initiatives or hot products lined up to maintain its strong flow of assets. The company will hew to its proven course, he said.
“We are over 70 years in this business,” he said, “and we have obviously seen all types of global events and all types of markets, and over those seven decades we have learned what we do best is investment management and not something else. Every company has a different philosophy and outlook, and it is not our place to second-guess the decisions of our competitors about how their business should be run. We concentrate on our business.”
