As the first Fed rate hike in nine years draws closer, American Funds are looking better.
The American Funds family of mutual funds is among the best-suited fund shops for rising interest rates for a handful of reasons.
In addition to their long and deep management experience, their active-management style and international stock exposure can work well when volatility picks up and domestic stocks begin to drag because of a strong U.S. dollar.
This fundamental advantage for American Funds is already evident this year in a big turnaround in performance to the positive side compared to previous years. For example, even an average performer in 2015, such as American Funds New Economy (ANEFX), is up 3.9% year-to-date compared to 3.2% for the S&P 500.
In 2014, the S&P’s 12.4% gain crushed that of -3% for ANEFX.
Now, let’s take a look at three of the best American Funds to tackle rising interest rates.
Best American Funds for Rising Rates: American Funds Growth Fund of America (AGTHX)
Sales Charge: 5.75%
Expenses: 0.66%, or $66 for every $10,000 invested
Minimum Initial Investment: $250
One of the best funds to own in the current environment of rising rates and a strong dollar is American Funds Growth Fund of America (AGTHX).
With the fund’s portfolio of high-quality large-cap growth domestic stocks, and a sprinkling of foreign stock, AGTHX is pulling ahead of the S&P 500 and its large-growth category peers.
Year-to-date AGTHX is up 5.9%, which is more than double the 2.7% gain for the S&P 500 and significantly ahead of the average large-growth fund, which is up 4.7%.
The top sectors in the portfolio are technology, consumer cyclical and healthcare, and the top three holdings are Amazon (AMZN), Gilead Sciences (GILD) and Alphabet Inc (GOOG, GOOGL).
Best American Funds for Rising Rates: American Funds Europacific Growth (AEPGX)
Sales Charge: 5.75%
Expenses: 0.83%
Minimum Initial Investment: $250
International stock funds can outperform U.S. stock benchmarks during periods of rising interest rates, and American Fund Europacific Growth (AEPGX) is a solid choice for this reason.
Although AEPGX tends to perform around average to above-average in its foreign large category, the fund consistently beats the MSCI ACWI index. Year-to-date, AEPGX is up 2%, which is even with the category average but easily ahead of the MSCI ACWI, which is at -1.8% for the year.
The solid global management team at American Funds helps put AEPGX ahead of both category peers and the benchmark for long-term performance with a strong 6%-plus 10-year annualized return.
Top holdings for AEPGX include Novartis (NVS), Barclays (BCS) and SoftBank Group (SFTBF).
Best American Funds for Rising Rates: American Funds Balanced (ABALX)
Sales Charge: 5.75%
Expenses: 0.59%
Minimum Initial Investment: $250
If you are looking for a solid core holding or an outstanding balanced fund that can stand up to rising rates and an uncertain market, American Funds Balanced (ABALX) is a smart choice.
Although ABALX holds bonds, the portfolio allocation can smooth out the bumpy ride of volatile stock prices and falling bond prices as interest rates rise. For a hint of what’s to come, the year-to-date gain of 2.5% beats 96% of other moderate-allocation funds, and the long-term returns for ABALX are consistently in the top 10% among category peers.
Rising rates don’t mean the end of the bull market for stocks, and some bond types hold up better than others when the Fed is in tightening mode.
The recent asset allocation was roughly 60% stocks, 32% bonds and 8% cash. The stocks are high-quality names like Microsoft (MSFT), Comcast (CMCSA) and Philip Morris (PM), and the bonds are average intermediate-term duration and an AA average credit quality.
ABALX and the other two featured American Funds can be good additions to a portfolio and could make a complete portfolio together during rising interest rates and for long-term holdings.
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 in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.
