The recent bear market has left many casualties, including just about every individual investor with money in the stock market. But the average Jane and Joe aren't the only ones who have been beaten down -- the big fund shops are also suffering from a lack of investor confidence.
Scared investors have yanked billions of dollars from the stock market and stuffed it into seemingly safer investments. Unfortunately, some big-name fund shops are feeling the heat more intensely than others.
Easy come, easy go
According to Morningstar data on recent fund flows, American Funds is losing ground to its rivals. The fund shop lost $5.1 billion from its coffers in the third quarter, marking a total of $19.3 billion in outflows for the year through September. During that time, competitors Vanguard and Fidelity have reported inflows. Of course, the big winner this year has been Bill Gross's PIMCO, which has experienced record inflows in 2009. Gross's Total Return Bond Fund (PTTAX) attracted $5.3 billion in September alone.
So why has American Funds fallen behind in the race for assets? Well, the answer probably has a lot to do with investors' latest passion -- bonds. In the wake of the latest market downturn, investors are rediscovering their preference for the safety of bonds.
Bond funds have been the hot place for new money this year, and American Funds hasn't really made a name for itself in fixed income. The fund shop's lineup does feature roughly 10 bond funds, although none of them have been standout performers. Unfortunately, by not having a long-standing expertise in the hot market segment of 2009, American Funds is losing ground to more-diversified rivals.
Haste makes waste
However, I think anyone abandoning American Funds does so prematurely and at their own risk. It's true that the fund shop doesn't have as wide a range of offerings as Fidelity or Vanguard does. In fact, I think the biggest help to the American Fund lineup would be to offer more in the way of small-cap funds.
Right now, the shop's only small-cap focused fund is American Funds SMALLCAP World (SMCWX), which invests in smaller names across the globe. The fund has done extremely well this year, posting a 52% gain, thanks to hot performance from holdings like U.S.-based biotech company Inverness Medical Innovations
But investors who ditch solid-performing American Funds in favor of the safety of bond funds in other fund families are making a mistake. Making a carefully thought-out adjustment to your asset allocation is one thing, but fleeing to the perceived safety of bonds in the wake of a tough bear market is self-defeating.
Anytime you see a widespread investor movement to a particular asset class or corner of the market, you should be wary. As seen in the recent move into gold and other commodities, investors are prone to being lured by hot recent performance and chasing returns. Such market- timing approaches typically aren't successful in the long run. Shifting assets out of equity funds just means that you're foregoing any further rebound these funds may make in the coming months or years.
American Funds may have missed the boat on bond funds. But in today's environment, I would argue that investors should be more concerned with finding and investing in top-notch stock funds, not retroactively looking for safety with fixed income. Unfortunately, most investors are well-versed in cutting off their nose to spite their face, and I think many of them are making such a move now.
Do one thing and do it well
American Funds can't be all things to all investors, but it has made a name for itself doing one thing very well -- large-cap equity investing. This shop has perfected the team approach to investing, so funds don't rely on one single star manager. Many of its funds are category leaders, despite shouldering tremendous asset loads.
Two of my favorite American Funds are Growth Fund of America (AGTHX) and EuroPacific Growth (AEPGX). Growth Fund of America invests in big-name growth stocks like Google
Likewise, EuroPacific Growth focuses on markets abroad, especially in Europe and the Pacific Basin. This winner has outperformed 94% of all foreign large blend funds in the past 15 years, and has also been a short-term champ, beating 86% of its peers in the past year. Names like Mexican telecom company America Movil
Ultimately, the important thing to note is that nothing fundamental about American Funds has changed. It was an excellent, top-performing fund shop yesterday and it still is today. Of course, having some diversity among fund families in your portfolio is a good thing. But throwing away a good equity fund in favor of following the crowd to the trendy corner of the market is just shooting yourself in the foot.
