After 2014 performances that ended up below the major market indices, some of the biggest of American Funds are leading the market in 2015.
One of the primary reasons for recent weakness among the biggest and best American Funds is that their domestic funds typically have more than 10% allocated to foreign stocks.
In the five previous calendar years, U.S. stocks have dominated foreign stocks, which effectively pushed many of the American Funds down in the ranks.
Using the SPDR S&P 500 (NYSEARCA:SPY) and iShares MSCI ACWI (NYSEARCA:ACWI) as respective proxies for U.S. stocks and foreign stocks, SPY handily outperforms ACWI in four of the past five years, with the one victory for ACWI being a narrow one in 2012.
However, 2015 is a different story. Year-to-date SPY has a price gain of 3.8%, whereas ACWI has a gain of 6.4%.
With a strong dollar, the big multi-national U.S. firms are getting a haircut on their profits while foreign exporting countries are benefiting. This is fundamentally how American Funds and other fund families with solid actively-managed funds in their lineups are beginning to pull ahead of the passively-managed index funds in 2015.
Here are three of the best American Funds that are beating the major market indices now.
American Funds Growth Fund of America (AGTHX)
Load Fee: 5.75%
Expenses: 0.66%
Minimum Initial Investment: $250
Investors who held American Funds Growth of America (MUTF:AGTHX) through a dismal 2014 are being rewarded for their patience now.
Last year AGTHX put up a respectable gain of 9.3% but that jump is weak compared to 13.7% on the S&P 500 and it placed the fund behind 60% of the large growth category of mutual funds.
Year-to-date in 2015, however, the Growth Fund of America is up 6.9%, compared to 3% for the S&P 500 and 5% for category peers.
The bump in performance this year is largely due to the fund’s exposure to non-U.S. stocks, which was recently a bit more than 12% of the portfolio. With a strong U.S. dollar, foreign exporters are adding to profits while U.S. multinational firms are seeing profits cut back.
This edge on major market indices is likely to continue for AGTHX as the strength of the U.S. dollar ironically holds back domestic stocks and the index funds that invest in them.
American Funds Smallcap World (SMCWX)
Load Fee: 5.75%
Expenses: 1.07%
Minimum Initial Investment: $250
Not only does American Funds Smallcap World (MUTF:SMCWX) have the foreign stock edge but it also benefits from a resurgence of small-cap stocks in 2015.
Like Growth Fund of America, Smallcap World had a tough 2014, where it fell behind 60% of its category (world stock) peers. But 2015 is a completely different story as SMCWX is crushing the benchmarks with a 12% year-to-date return compared to 8.1% on the MSCI ACWI and 6.6% for the average world stock fund.
Like any other forecast with stocks, it’s difficult to know how long the strong leadership will continue for SMCWX. When the next bear market finally comes, investors will flee the higher-risk funds like Smallcap World, sending prices potentially below the index and category. For example, in the throes of the last bear market, in 2008, SMCWX got hit with a -49.4% return, which was worse than the benchmarks.
But for long-term investors, Smallcap World can be smart, assuming its high performance ranks for the 10-year and 15-year returns can duplicate in the next decade-plus period.
American Funds Beating Index Funds: American Funds New Economy (ANEFX)
Load Fee: 5.75%
Expenses: 0.79%
Minimum Initial Investment: $250
American Funds New Economy (MUTF:ANEFX) is another fund in the American Funds lineup that took a hit in 2014 but is bouncing back in 2015.
A strength of actively-managed funds is their ability to deviate away from the mainstream of index funds. But this strength will often translate to occasional under-performance as is the case with many of the biggest American funds, including New Economy.
In 2014, the fund had a weak 4.6% return compared to 13.7% on the S&P 500 Index. This performance ranked behind 93% of other large growth funds.
But to be fair, the New Economy fund goes beyond categorization and might even be more accurately described as a world stock fund because of its over-weight allocation to foreign stocks, which was recently close to 30% of the portfolio.
However, for the year-to-date, this foreign stock exposure has catapulted the New Economy fund to a 9.2% return, placing it ahead of 94% of large growth category peers and more than double the 4% return on the S&P 500. And even with a tough 2014, New Economy still has 3-year, 5-year, 10-year and 15-year returns that are significantly ahead of the large growth category and the S&P 500.
This is a similar story among many of the biggest and best American Funds. Their style deviations will often find them behind major market indices at least one to two years out of every five years but long-term returns still tend to remain above index funds in their respective categories.
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.
