The Silent Strong Type

Scott Maclise is a mutual fund wholesaler's dream. Maclise, of LPL Financial in San Rafael, Calif., writes $4 million worth of fund sales each year. Eager to curry favor, fund wholesalers have offered Maclise sun-drenched getaways and rounds of golf at exclusive courses. While no wholesaler would ever admit to trying to business, perks are certainly offered to gain access. Yet the most Maclise ever

Scott Maclise is a mutual fund wholesaler's dream. Maclise, of LPL Financial in San Rafael, Calif., writes $4 million worth of fund sales each year. Eager to curry favor, fund wholesalers have offered Maclise sun-drenched getaways and rounds of golf at exclusive courses. While no wholesaler would ever admit to trying to “buy” business, perks are certainly offered to gain access.

Yet the most Maclise ever received from the wholesaler of American Funds is “a dozen golf balls, maybe once a year,” he reckons. “The last time was a year ago, and that was after I dropped a $1 million ticket.” But even without doling out the perks (the golf balls retail for about $40), the Los Angeles-based American Funds still makes up 90 percent of Maclise's fund business.

Maclise is not alone in his devotion to American. According to consultancy Tiburon Strategic Advisors of Tiburon, Calif., 72 percent of 1,500 independent reps surveyed in 2003 said they have used American Funds. Brokers, like Maclise, are drawn to American Funds by its consistent performance and reasonable management fees — two easy sells to clients.

Quietly Gathering

In fact, in terms of asset gathering, American Funds has absolutely dominated over the last 12 months. In that time, American took in $86.2 billion net in fresh investments — 27 percent of the entire fund industry's net take for that time period. Advisors and their investors, angry at fund companies who betrayed their trust in the so-called market-timing scandals, have been pulling money from funds implicated in the scandals and have been investing it with American Funds, a load-only fund sold solely through financial intermediaries not implicated in the scandals. American — with around $522 billion in assets — does not advertise, but markets directly to advisors in a very low-key way. (So low key, in fact, that American executives declined to be interviewed or photographed for this story, saying they didn't want the attention or to be viewed as self-promoting.)

Michael Halberstadt, an independent rep in Los Angeles affiliated with Royal Alliance, often gets invitations to fancy dinners at L.A. hot spots like Ruth Chris' Steak House or the Stinging Rose restaurant. But American Funds? “One time American Funds had a bunch of us for an afternoon talk with coffee and fruit,” Halberstadt says. “And they had one of their chief portfolio counselors talk, who was boring beyond belief.” Despite the stingy afternoon of coffee and pineapple slices, 75 percent of Halbertstadt's $17 million book is invested with American.

Another advisor, based in the South, has had a similar experience with the fund family. When he holds client dinners, American marketing reps are happy to show up and make presentations. And, if the bill isn't much, say around $800 or so, American will pay all of it. But, this advisor says, “When I have seminars in big cities, when the bill is $2,800, they'll pay half. They don't pick up the whole bill. They have their standards, and you've got to respect that.”

You can get away with being stingy when you're good. Of American's 26 stock and bond funds, 20 are in the top third of their peers for the last three- and five-year periods, according to Morningstar. This is not to say that American is a performance superstar. The funds rarely top the performance charts in any given year. Yet, more than 88 percent of the company's funds beat their peers over three and five years, for the period ending Dec. 31, 2003, according to Morningstar. In 2001 and 2002, at the bear market's nadir, 73 percent of the equity funds beat their peers for both years. Eighty percent beat the S&P 500 in each of the two years. And when it comes to expense ratio, the firm's 0.77 percent average is well below the 1.19 industry norm.

“I never had to apologize for using them,” says Tif Joyce, a broker with Joyce Financial Management in Sebastopol, Calif. Of course, the loads aren't cheap. “American funds are expensive to buy,” says Maclise about the 5.75 percent load on the A shares (breakpoints starting at $25,000 lower the load). “But they're not expensive to own.”

Steady Freddy

Advisors also like the funds because there's little portfolio turnover (just 31 percent a year, vs. 117 percent for the industry) and little staff shuffling. Portfolio managers tend to stay decades as opposed to the 5.2 years of tenure that has become the mutual fund norm. Its low-key strategy also applies to its portfolio management structure. Funds are managed by a team, as opposed to relying on a single star portfolio manager. During technology's heyday, when everyone seemed to be trotting out tech sector funds, American refused to launch one, maintaining that shareholders wouldn't be well served by such an offering.

Brokers also like American's dedication to them. Even when other companies started exploring different channels to sell their funds, courting the investing public directly with advertisements in the mainstream press and offering no-load shares, American continued to believe that advisors were critical to a retail investor's financial life.

Building its business on the coattails of brokers has proved to be a sound business model. Now the third-largest fund company, money that comes into American funds tends to stick around, mainly because of its hefty 5.75 percent front-end load. Compare that to the billions that poured into the growth-oriented Janus funds in the late 1990s, only to be yanked out when the market turned.

“We think that people are best served when they get advice,” says Chuck Freadhoff, American's spokesman. “When somebody buys the right fund for the right reason, they are much more likely to be a longer-term shareholder.”

For years, American maintained that clients were best served by front-loaded A shares because of their low expenses. But long after most fund families made other share classes available, American finally capitulated. The firm introduced back-end load shares in 2000. It was the first time the firm changed how funds were sold since its founding in 1931. The news may have been greeted with a yawn in the fund industry, but within company headquarters, it was the result of years of hand-wringing and analysis. The following year, the firm introduced level load, C-class shares, followed by a no-load version, the F shares, available through Schwab's One Source. The F shares can only be sold through an advisor, however.

“People do say we are a little slow,” says Freadhoff. “We don't jump into anything quickly.”

Not-So-Harsh Words

“They recognized that the marketplace was shifting,” says Geoff Bobroff, a fund expert based in Greenwich, R.I. “And the shift was that brokerage firms were moving to a fee-for-service model, primarily because brokerages were riddled with investigations over commissions.”

Of course, not every advisor is keen on American's rather stingy marketing strategy. Some advisors complain about the lack of face time with wholesalers, possibly because American's 100 sales reps are stretched thin.

“The job of the wholesaler is to help the broker build his business,” says one Atlanta-based broker who asked not to be named. “American Funds thinks the job of a wholesaler is to sell American Funds.”

Mike Curry, another Royal Alliance rep, says he doesn't use the American Funds at all because the firm's holier-than-thou attitude. “It's like they're doing you a favor by selling you their funds,” he says.

All things considered, those are pretty small criticisms. The company's perceived ethical standards have so far served it well in light of the market-timing and late-trading scandals now roiling the fund world. So far, American has been unscathed. It has responded to the rash of investigations by New York Attorney General Eliot Spitzer in its customary fashion — by keeping quiet. The company refused to make anyone available, other than Freadhoff, the company spokesman.

“We don't want it to seem as if we are benefiting from the current spate of bad news in the industry,” Freadhoff says. “None of this is good for the fund industry.”

Fund observers believe American will continue to be one of the big winners from the fund fallout as advisors and their investors continue to flee the growing ranks of companies caught up in the mess. And now that retail investors again seek professional financial guidance, American sits in the sweet spot with its loyal brokers

The Funds on Top

American tops the list of best-selling funds groups. (Dollars in millions).
Complex Name Monthly Net Flows Feb. ‘04 YTD Net Flows (through Feb.)
2004 2003
1. American Funds $8,937 $20,635 $6,101
2. Vanguard Group 7,838 18,811 4,674
3. Fidelity Distributors 4,237 9,034 1,361
4. Dodge & Cox 1,819 4,651 1,655
5. T. Rowe Price Investment Services 1,658 4,292 967
6. PIMCO Funds 1,724 4,191 6,049
7. Barclays Global Investor Funds 1,280 3,737 2,571
8. Franklin Distributors 1,368 2,764 644
9. Fidelity Advisors 915 2,059 (46)
10. Van Kampen Investments 501 1,534 192
Source: Financial Research Corp.
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