Why American Funds Are Underperforming

Some of the biggest names at American Funds are lagging greatly

The American Funds family of mutual funds is home to some of the most widely held funds in the world. They can be found in 401(k) plans, IRAs, brokerage accounts and even 529 plans. But some of their most recognized names are not performing as well as their lofty assets under management might suggest.

thumbs downTheir biggest fund, which has more than $142 billion in total assets, is American Funds Growth Fund of America (MUTF:AGTHX), which comes in many different share classes (I counted 14 of them).

In 2014, the Growth Fund of America gained 9.5%, which is not a poor return in absolute terms, but the performance is 4% below that of the S&P 500 Index, which gained 13.5%.

Another large laggard, weighing in at a hefty $70.8 billion, is American Funds Fundamental Investors (MUTF:ANCFX), which performed 4.5% below the S&P 500 and under-performed 77% of its large blend category peers in 2014.

Adding insult to injury, ANCFX is losing to 59% of the category for 3-year returns and is below 62% for 5-year performance through the end of 2014.

Fortunately, the aforementioned American Funds mutual funds are not the family’s worst performers, which is a distinction reserved for some of their smaller funds (although still large in relative terms).

  • American Funds New Economy (MUTF:ANEFX) is a $14.6 billion fund that ranked behind 93% of its large-cap growth stock category peers in 2014.
  • American Funds Short-term Bond Fund of America (MUTF:ASBAX) is a $4.6 billion fund that was beaten by 76% of its short-term bond fund peers last year and ranks in the 92nd percentile for 5-year annualized returns through 2014.
  • American Funds Limited-Term Tax-Exempt Bond (MUTF:LTEBX) is a “small” $3 billion fund that lost to 95% of Municipal Intermediate-term Bond funds in 2014 and ranks in the bottom quartile for 3-year, 5-year, and 10-year returns against category peers through 2014.

When Bigger Doesn’t Mean Better

One general disadvantage for American Funds, especially the big marquee names like Growth Fund of America and the Fundamental Investors fund, is that they are simply too big for their own good (or that of their shareholders).

As I wrote in my story last year on mutual fund asset bloat:

“When actively managed funds attract too much money, they have to get bigger to accommodate those assets. If they get too big, they start to perform like an index fund (or worse).

“As the assets grow larger, eventually the higher expenses of the actively managed fund make it underperform its benchmark index and the manager fails at his or her primary objective — to show value.

“Voila — you have asset bloat.”

To be fair, I estimate that only around one-third of American Funds were big losers in 2014.

But the majority of American Funds with 1-year returns better than 50th percentile rank in performance are predominately balanced funds, target retirement funds, and 529 funds. This means their biggest, best-known funds are among the worst performers.

The Biggest of American Funds Are Not American Enough

If the name of your fund has America in it twice, it had better be … well, American! But that’s not fully the case with American Funds Growth Fund of America, which consists of roughly 11.5% foreign stock.

Another big loser highlighted here is American Funds Fundamental Investors, which recently held 31.5% of its portfolio in foreign companies.

And so we have a bit of an irony: The biggest funds in the American Funds family are lagging category peers that are more American than they are!

Going forward and looking at 2015 and beyond, it’s difficult to make a strong case that foreign stocks will outperform U.S. stocks. Furthermore, for diversification purposes, a prudent investor will hold their foreign stocks in a foreign stock fund, not in one that appears to be a large-cap domestic fund. In other words, don’t invest in funds whose portfolios don’t match their purposes.

In summary, be sure to proceed with caution when investing in any actively-managed mutual fund, regardless of its stature, when the total assets under management are significantly above average. And when you want a fund that invests solely in American stocks, be sure to check the portfolio holdings.

And to end on a positive note, I showed some love for American Funds in my recent story on the 3 Best American Funds for 2015. Be sure to check it out.

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.

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