Buying American In Tough Times

Some major fund families have been damaged by scandal, but American Funds and a few others are—so far—keeping it clean.

As chairman of the Investment Company Institute, the mutual fund trade group, Paul Haaga has had a tough year. After making speeches last spring defending the integrity of his industry, Haaga faced a flood of criticisms from journalists and Congressional skeptics.

But the chairman is having a sweeter time at his other job, executive vice president of Capital Research and Management, advisor to the American Funds family.

The big load-fund company is recording one of its strongest sales periods ever. For the first ten months of 2003, the entire fund industry recorded $183 billion in net inflows, and American—the third-largest fund company in terms of assets—alone accounted for $48 billion, or 26 percent of the assets, according to Boston-based Financial Research Corporation.

Although American Funds has had a strong following among financial intermediaries for years (good results and relatively low expenses), part of the firm’s success recently can be attributed to the fund trading scandals.

The scandalous headlines have been driving investors from companies that have been mentioned in the news, such as Putnam Investments, Janus Capital and Alliance Fund Distributors. Putnam has been the year’s biggest loser, with outflows of $11 billion through the end of October, about 8 percent of its current assets; Janus has experienced a $9.7 billion outflow.

Some of that money has been finding its way to American and other companies, such as Fidelity Investments and T. Rowe Price Group, which have so far kept their noses clean. Fidelity, the largest fund company, has had $22 billion in net inflows in the first ten months of the year. The movement toward clean fund groups could last for some time, say consultants. “If you are a registered rep, there is no way you are going to call up a client and suggest buying a fund that’s been criticized in the headlines,” says Burt Greenwald, a fund consultant in Philadelphia.

American’s success began even before New York Attorney General Eliot Spitzer set his sights on illicit fund speculators. In 2002, American led the industry with $38 billion in inflows, or 28 percent of the industry’s total. The rise of American—the biggest load family—represents a sharp turnaround in the sales standings. From 1995 through 2001, the top company was always a no-load specialist, such as Vanguard Group—still one of the best sellers, ranking second this year—or Janus.

In most years, American accounted for 7 percent or less of total sales. Then as the market collapsed, no-load investors began pulling back and turning to companies like American that are sold through advisor channels.

Another reason for American’s dominance is the company’s emphasis on cautious investing, which helped the company’s funds avoid big losses in the downturn and resulted in strong long-term track records. “Investors are moving back into equities, but they are not jumping into high-octane kinds of products,” says John Benvenuto, director of research for Financial Research Corp.

Of the ten top-selling funds this year, five are from American Funds. In the number one position with $10 billion in net flows is American’s Growth Fund of America, a notably tame member of the large growth category. While the average large growth fund lost 13.8 percent in 2000, Growth Fund of America stayed solidly in the black. During the past decade Growth Fund of America has outdone 98 percent of its competitors and beaten the Standard & Poor’s 500 Index by more than 2 percentage points annually.

The mutual fund scandals are far from over—and with a number of fund families taking actions that favored a small cadre of high-net-worth investors over the mass mutual funds audience, the consequences are likely to be great. Avoiding the potholes will be a tough task; so far, a few are managing it.

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