Growth Fund of America (AGTHX) is having a stellar 2015 and looks to maintain its leadership for the foreseeable future.
As is the case with most of the funds in the American Funds lineup, Growth Fund of America is a solid long-term holding. However, impatient investors have been dumping shares of AGTHX because of a terrible 2014 and a 5-year annualized return that is below the S&P 500 Index. The ever-expanding popularity of index funds is also a big factor in AGTHX outflows, which were more than $93 billion in the five years ending June 2014.
How far off the mark was performance? Last year AGTHX had a gain of 9.3%, which is good in absolute terms, but the S&P 500 gained 13.7% and the average large growth fund was up 10%. The 5-year annualized return for AGTHX is 16.2%, but the S&P 500 eclipses it at 16.9% and category peers did 16.3% for the period.
But 2015 is a different story. Year to date, AGTHX is up 6.4%, which is more than double the 2.6% gain on the S&P 500.
Why Growth Fund of America Is Beating the S&P 500
The primary reason Growth Fund of America is having such a great year is that it holds a significant amount of foreign stocks, which are getting a lift from a strong U.S. dollar. The recent foreign stock allocation was 12.3% of assets, which is almost double the exposure of the average large growth stock fund.
But the foreign exposure is the same reason AGTHX had a tough 5-year period prior to 2015. This brings us back to the point I made earlier about the fund being a solid long-term holding. Although Growth Fund of America has had a few poor years in the past five, the long-term annualized returns are still strong.
The 10-year annualized return for AGTHX is 8.6%, which compares with 8.0% for the S&P 500 and 8.4% for the average large growth fund. The 15-year return also beats the index and category.
Foreign stock exposure is not the entire reason for a strong 2015 for AGTHX. The management team has done a good job of buying and holding some outstanding U.S. stocks as well.
Most of the fund’s top holdings are domestic stocks, which include top performers, such as Amazon (AMZN), Gilead Sciences (GILD) and United Health Group (UNH).
Investors Best Suited for AGTHX
Although Growth Fund of America is having an outstanding 2015, the fund is best suited for long-term investors. Judging by massive outflows from AGTHX in recent years, I believe that those long-term investors should also be patient.
As with the vast majority of actively managed funds, investors should expect that at least one of every three years will result in performance below the benchmark or category average.
Growth Fund of America is managed by Capital Research and Management Company, which has done well in the past with its team approach to asset management. This helps lighten the load of managing such a big fund like AGTHX.
Therefore, the team’s impressive track record is no fluke and there is no reason to believe it won’t continue its long-term performance. Their average tenure of 10-plus years makes it one of the category’s more experienced teams. The below-average expense ratio of 0.66% will also help give a lift to long-term returns.
For investors wanting to buy AGTHX, the fund has a front load 5.75%, and the minimum initial purchase is $250. However, some investors might qualify for price breaks or load-waived shares. Growth Fund of America is also a popular fund in 401(k) plans, most of which offer one of the many “R share” class versions, which do not charge a load.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. His No. 1 holding is his privately held investment advisory firm. Under no circumstances does this information represent a recommendation to buy or sell securities.
