by Will Ashworth | March 17, 2014 9:34 am
American Funds might not be the foremost name in mutual funds, but at $1 trillion under management for institutions and individuals, it has built enough of a name that investors should pay it some attention.
Granted, it hasn’t been an easy time in recent years as American Funds has seen cumulative outflows of $242 billion since 2007.
Still, known for active rather than passive management, American Funds historically has provided investors with above-average long-term performance in its mutual funds. As a result, a total of 10 funds made Morningstar’s 2013 “Fantastic 51” list, a group of 51 actively managed mutual funds chosen using several criteria including performance.
While the 10 on this list are a good place to start, I’ve considered all 34 mutual funds managed by American Funds. Out of that group, here are five American Funds selections worth owning:
While not the oldest fund in the stable, the AMCAP Fund (AMCPX) has been a steady performer, achieving an average annual return of 11.6% since its inception in May 1967, more than warranting its place among the Fantastic 51. Four managers, whose average tenure at American Funds amounts to 23 years, manage a total of $39 billion spread across 124 holdings. In a little over three years, those assets under management have more than doubled.
AMCAP’s turnover averages around 30% annually, meaning it turns the entire portfolio every three years, a rate that is lower than many of its other equity-related funds.
Approximately 77% of the portfolio consists of large-cap stocks with an average market cap of $33 billion. Its top 10 holdings are biotech-friendly, with Gilead Sciences (GILD), Biogen Idec (BIIB), Amgen (AMGN) and Alexion Pharmaceuticals (ALXN) taking four of the first seven spots. In fact, biotech stocks represent the biggest industry weighting at 10.5%, almost double the next biggest — software — at 5.8%.
AMCPX has an annual expense ratio of 0.74%, or just $74 annually for every $10,000 invested — 58 basis points lower than the Lipper Growth Funds Average. It also requires a tiny minimum investment of $250. However, worth noting is the 5.75% sales load — something that will really eat into returns unless you plan on holding over the long term.
Still, this is one fund that American Funds won’t be putting out to pasture anytime soon.
Also in the Fantastic 51, the New World Fund (NEWFX) tends to invest outside the country, opposite to its counterpart above.
Mandated to invest at least 35% in qualified developing countries, NEWFX currently has 80% of its $23 billion in fund assets invested outside the U.S. The primary benefactors of this are Europe and Asia, which together account for 67% of the total portfolio. The only U.S.-based stock in its top 10 holdings is Google (GOOG) with a weighting of 1%. Like AMCPX, however, the top 10 holdings represent a very small percentage of the overall holdings.
The largest industry representation is from Internet-related companies which account for 6.7% of the portfolio. In terms of specific holdings, the top stock is Baidu (BIDU), the Chinese search engine, with a 1.8% weighting.
In addition to the equities, the fund’s mandate allows it to invest as much as 25% of its assets in debt securities, some of which can be investment grade or below. At the moment, that percentage is slightly over 10%.
All told, With 263 stock holdings and 149 bond holdings, investors receive a very diversified, international portfolio.
Since its inception in May 1999, this particular offering from American Funds has achieved an average annual return of 8.6%. That’s good when you consider that 32% of the holdings are invested in Europe, which has only recently begun to rebound.
NEWFX charges 1.06% in expenses and also has a 5.75% sales charge.
The New World Fund and the AMCAP combined do a good job covering the globe for American Funds.
Although this particular fund is not found among the Fantastic 51, Morningstar still gives American Funds SmallCap World Fund (SMCWX) a four-star rating, so it’s definitely not a dog.
Investing in equities with market caps of $4 billion or less, SMCWX’s 11 managers can go anywhere to find the best small caps. At the moment, the fund’s $24 billion in fund assets is invested almost equally between U.S. equities and non-U.S. equities.
You’d think being a global small-cap fund that turnover would be high, but in 2013 it was just 37%, only slightly higher than its two large-cap stable mates from above, and much lower than the category average of 62%. This is good to see because small caps often take their time coming to life.
The managers have spread their bets over 494 stocks, including Netflix (NFLX), the fund’s largest holding with a weighting of 1.7%. While biotech again plays a big role in the fund, other industries are well represented including hotels, restaurants, specialty retail and the media. My favorite stock in its top 10 would have to be Domino’s Pizza (DPZ), not so much because I eat their pizza but because it’s been one of the best-performing stocks over the past years, achieving an annualized total return of 68% through March 11 compared to 27% for the overall restaurant category and 24% for the S&P 500.
Speaking of performance, SMCWX has delivered nicely, averaging a total return of 26% over the same period.
The SmallCap World fund does a great job rounding out my equity recommendations from American Funds. It charges 1.13% and also has the 5.75% load for A shares.
You can tell by its name that capital appreciation is an afterthought for American Funds’ Income Fund of America (AMECX).
Around since December 1973, AMECX managed to provide buy-and-hold investors with an average annual return of 11.2% since inception. That’s exceptional when you consider that it’s beaten its category average (according to Morningstar, which gives the Income Fund four stars) by 250 basis points annually over the past five years. Out of a total of 669 funds, AMECX ranks in the top 10%.
Although its mandate is focused on income, AMECX still owns 160 large- and midcap stocks. Its top 10 holdings represent 19% of the portfolio, with names like Merck (MRK), Microsoft (MSFT) and General Electric (GE) rounding out the mix. The fund also may invest up to 25% of the fund’s assets in non-U.S. equities. As of the end of January, AMECX had 22% outside the U.S. in stocks and another 4% in bonds.
Income investors will be happy to know that the fund invests in almost 1,200 bonds producing a 30-day SEC yield of 2.8%, which means the fund achieved almost 15% capital appreciation in 2013. Its only negative year in the past decade was in 2008 when it lost almost 29%, but that still was less than the 37% loss by the S&P 500.
AMECX A shares also charge the initial 5.75% load fee, but regular expenses are just 0.58%. If you’re looking for a good counterbalance to your equity funds, this would be worthy of your consideration.
I picked American Funds 2035 Target Date Retirement Fund (AAFTX) — a fund of funds — for two reasons:
First, AAFTX holds all four of the mutual funds recommended previously. Secondly, the year 2035 is approximately when I might begin to consider retirement. Although the fees on target-date funds can be more expensive than your average equity fund, AAFTX charges 0.76% annually, which is more than reasonable. (Though again, there’s also the 5.75% charge for A shares.)
About 80% of the fund’s $2 billion in assets is invested in either growth-related equity or fixed-income investments. Just 5% is dedicated to bond funds exclusively. It’s something to keep in mind if you’re particularly focused on a portfolio that’s heavily weighted in bonds.
However, if you’re interested in the four funds I’ve mentioned previously, which represent 23% of the portfolio, the 2035 target date fund offered by American Funds is definitely worth considering. In existence since 2008, its performance has been workmanlike, if not spectacular.
If you want an all-in-one solution for your investment portfolio, AAFTX is the way to go.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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