American Funds losing luster in eyes of reps

Financial advisers' loyalty to American Funds appears to be waning, as the firm saw the largest outflows of any fund company for the first half of this year.

Financial advisers’ loyalty to American Funds appears to be waning, as the firm saw the largest outflows of any fund company for the first half of this year.

Year-to-date through June 30, investors had pulled $19 billion from the fund company, and seven of the 10 funds with the biggest outflows were from American Funds, according to Morningstar Inc.

Meanwhile, competitors Fidelity Investments and The Vanguard Group Inc. saw inflows of $421 million and $39.9 billion, respectively.

American Funds, which is advised by Capital Research and Management Co. and sold through intermediaries, for years has been a darling of the adviser community. (Read comments from dozens of advisers on American Funds’ outflows and whether they’re sticking with the company.)

Just this year, the firm won four of six InvestmentNews Advisers’ Choice Awards. And while the company’s fund performance got hit when the market tanked in 2008, it didn’t fare much worse than other fund companies, experts said.

But advisers have come to expect stellar performance from American Funds, particularly because it did so well after the market downturn in 2001, said Sonia Morris, a Morningstar analyst.

“Advisers may have expected the same resilience in the last bear market, and they didn’t get that,” she said.

TOO BIG?

As more advisers opt for exchange-traded funds over mutual funds, American Funds has more competition than ever, Ms. Morris said. American Funds has no plans to launch ETFs, according to company spokesman Chuck Freadhoff.

Without standout performance to keep their attention, American Funds may need to reach out to advisers more. In interviews, advisers cited several reasons why the firm may be experiencing huge outflows, including poor wholesaler support for its offerings, and concerns that its funds are getting too big.

And while advisers may have stuck with American Funds in the past to earn commissions, the company now offers fee-based versions of their funds, a structure that makes it easier for a rep to switch to a competitor’s fund.

“I just don’t think that American Funds is as concerned about their brokers as a lot of the other smaller fund companies are,” said Nancy Caton, an independent adviser with $165 million in assets under management.

But American Funds remains committed to the adviser market, Mr. Freadhoff said. “We believe in the value of advice, and we work only through advisers,” he said.

With $835 billion in assets, American Funds is still the second-biggest fund company, behind Vanguard, and it is important to keep the amount of the firm’s outflows in perspective to the overall size of the firm, Ms. Morris said.

And long-term performance is still solid, Mr. Freadhoff said. Fourteen of American Funds’ 15 equity funds with 10-year track records have positive returns, he said.

But on a shorter-term basis, many of the firm’s funds have underperformed. The Growth Fund of America, Capital Income Builder and Washington Mutual Investor funds — all of which were among the top 10 funds in outflows during the first half — have trailed their peers during the past year, according to Morningstar.

American Funds attributes its outflows to the fact that more investors are moving from equity to fixed-income funds.

“When you have a shift from one asset class to another, that’s going to affect all funds, and since ours are largely equity-based, this isn’t surprising,” Mr. Freadhoff said.

‘DISAPPOINTING’ RESULTS

But even American Funds’ Bond Fund of America, which has trailed its category by 2.92% for the past three years, had first-half outflows of $2 billion.

Mr. Freadhoff conceded that the Bond Fund of America has had “disappointing” results, but said that it has turned around its performance. The fund had returned 5.23% year-to-date through last Wednesday, outperforming its category by a negligible 0.09%, according to Morningstar.

As more advisers migrate to a fee-based model, American Funds is now on a more level playing field with other funds, said Steve Johnson, an adviser with Raymond James Financial Services.

“I still use American Funds, but I also use many other managers and funds, and it’s much easier to switch with a wrap account model,” Mr. Johnson said.

But some advisers worry that American Funds’ portfolios have become too large.

The problem with huge funds is that they can’t be nimble during volatile times, Ms. Caton said. She still has some clients in American Funds because she doesn’t want them to get hit with capital gains losses, but she is selective about putting more money into the funds due to their size.

American Funds continually considers closing funds but hasn’t found a reason to do so as of yet, Mr. Freadhoff said.

“We have not seen any evidence that the size of our funds has inhibited our ability to produce good returns for their investors,” he said.

Advisers also said that while American Funds has good marketing materials, its wholesalers tend to provide less support to advisers than their peers, which has become more of an issue due to the recent market downturn and the firm’s underperformance.

“We didn’t really get a lot of support, and I think the wholesalers aren’t very active in helping advisers with holding client events,” Mr. Johnson said.

“That’s not their corporate philosophy,” said Ms. Caton. “They do what they do.”

American Funds tries to make up for what it lacks in external wholesalers with internal wholesalers who work the phones.

“Given our size and the number of advisers who sell American Funds, this is a concern that we have heard over a number of years, and one of the ways we have responded to that is by having a very robust internal sales force,” Mr. Freadhoff said.

The ratio of internal wholesalers, who call and e-mail advisers, to external wholesalers, who are on the road, is 1-to-1, which is the best ratio in the business, Mr. Freadhoff said. The firm has 100 wholesalers.

American Funds doesn’t have any plans to change its wholesaler model or add wholesalers, Mr. Freadhoff said.

But if the outflows continue, advisers hope that American Funds may change its mind.

“Maybe they will be more proactive in the future,” Ms. Caton said.

E-mail Jessica Toonkel at [email protected].