When I started my career as an investment advisor 16 years ago, the American Funds family of mutual funds was a dominating force in the investment universe.

But times have changed, to say the least, since 1998.

With the advancement of passive investing, the introduction and eventual popularity of ETFs and vast online resources and tools for do-it-yourself investors, financial products and services have undergone a significant metamorphosis in the past decade and a half.

American Funds? Well … it hasn’t done anything noteworthy or exciting other than expand their mutual fund roster by adding new share classes to their old roster of funds.

Then again, mutual funds don’t need to be exciting to serve investors well. Boring can be a good quality in mutual funds, but only if the boredom is a result of unchanging reliability in terms of performance.

There’s a reason I haven’t recommended American Funds to clients in years.

In fact, there are three:

#1: American Funds’ Mutual Funds Are Loaded With Fees and Expenses

By my count, American Funds offers 775 mutual funds, when all share classes for each mutual fund are included. More than 600 charge front-loads, back-loads, level-loads or 12b-1 fees. These are features most attractive to commission-based stock brokers and similar advisors looking for some kind of revenue sharing in the sale of investment products.

But are the expenses justified?

Expenses tend to be a drag on performance. An extreme example can be found with American Funds Short-Term Bond Fund of America C (ASBCX), which charges a 1% 12b-1 fee, often referred to as a “level load.” And it also charges 1.45% in expenses annually, or $145 for every $10,000 invested. Every single percentage point is crucial with short-term bond funds, which is why ASBCX is among the worst in its category. I analyzed the one-, three- and five-year returns, and performance ranks do not get any better than 98th percentile for either of those periods. Only 2% of all short-term bond funds performed worse.

To be completely fair, the typical American Funds mutual fund has below-average expenses. However, the investing community today is highly populated with educated do-it-yourself investors and fee-only investment advisors that seek (and can easily find) better-performing mutual funds and ETFs with much lower expense ratios than American Funds offers.

#2: American Funds’ Mutual Funds Are Mostly Mediocre Performers

American Funds might find itself a victim of its own success.

For example, the larger the size of assets under management, the more difficult it is to achieve superior returns. (I covered this problem with mutual funds recently in my article on asset bloat.)

Consider one of the first funds in its lineup, American Funds Washington Mutual A (AWSHX), a large-cap stock fund that opened to investors all the way back in 1952.

When including all share class offerings for AWSHX, total assets under management are $72.8 billion. That’s big! But bigger is not always better with mutual funds, especially with the actively managed kind like this.

What happens with asset bloat is that the managers are forced to buy more holdings with larger capitalization. Eventually the fund looks and acts like the index.

In this case, the 10-year annualized return of AWSHX, as of June 30, 2014, is 7.7%. The S&P 500 Index had put up 7.8% in that time.

After factoring in expenses, the biggest funds lose to their respective benchmark index.

#3: American Funds’ Mutual Funds Are Not Always True to Label

If you want to construct a truly diversified portfolio, you will do your best to select funds that are … well, diverse! What I mean is that your mutual funds should have objectives that are true to the label, so to speak.

Several of American Funds’ most popular mutual funds have holdings that do not match the apparent objective of the fund. Many investors (and non-fiduciary financial advisors) do not read the fund prospectus and just allocate a mutual fund to a portfolio based upon what appears to be the fund objective.

For example, when building a portfolio, if you allocate a specific percentage to domestic large-cap stocks, you should buy a large-cap stock fund that invests only in U.S. companies. But what if the fund you bought also invests in foreign stocks? Assuming you allocated a set percentage to foreign stocks already represented in a separate fund, your supposed U.S. large-cap stock fund with foreign stocks in it has just created fund overlap.

Consider one of American Funds’ biggest and most popular mutual funds, American Funds Growth Fund of America A (AGTHX). With the words American and America in the fund name, and online research sites calling it a “large growth” fund (with no explicit mention of foreign stocks), an investor can easily be led to believe that AGTHX invests only in American companies.

Not so.

The fund recently held more than 10% foreign stocks in its portfolio, and the prospectus and AGTHX details page state that that “the fund may invest up to 25% of its assets in securities of issuers domiciled outside the United States.”

Not only does this cause great potential for unwanted fund overlap in a portfolio, but it drags on performance when foreign stocks are out of favor.

Bottom Line

To summarize, American Funds does have a handful of decent funds in its lineup. However, taken as a whole, their mutual funds are over-sized, mediocre achievers that are likely to be most attractive to commissioned-based brokers and non-fiduciary advisors.

For the remaining majority in the investment community, low-cost index mutual funds and ETFs are a better bet.

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.