Is American Funds losing its touch with financial advisers?
That is the question that some advisers are asking as Capital Research and Management Co., which runs the American Funds, prepares to take the wraps off a suite of mutual funds intended to offer advisers a predetermined mix of investments.
The planned launch of eight funds of funds next month and a series of college savings target date funds this fall will mark a dramatic change of course for the fund company, which has based its product lineup on the premise that advisers prefer to assemble their own asset allocation models — as opposed to investing in funds that do it for them.
“In the past, we've let advisers work with their clients to decide the best allocation, based on their time horizon and risk,” said American Funds spokesman Chuck Freadhoff.
However, a growing number of advisers are asking for products that automatically adjust their allocations, he said.
Advisers “want to be able to make just one decision, as long as it fits with the client's goals,” Mr. Freadhoff said.
The turnabout comes at a difficult time for American Funds. Since its assets peaked at $1.2 trillion in 2007, the firm has experienced a steady stream of outflows.
In fact, next month will mark the three-year anniversary of the last time that American Funds had a single month in which more money came into the firm than was withdrawn.
Investors have yanked a net $239 billion in assets from American Funds since May 2009, according to Lipper Inc. Although that may not seem like a lot, compared with the $919 billion that the firm still manages, the sum on its own would be enough to fund the nation's sixth-biggest mutual fund family.
Unlike the majority of its competitors, American Funds has long resisted the urge to gather assets by introducing “flavor of the month” mutual funds. For example, when the firm's assets exploded in the mid-2000s, it launched just three new funds.
Likewise, American's CollegeAmerica Section 529 college savings plan, the nation's largest, with $33 billion in assets, will be among the last to offer target date funds.
“American Funds was the big anomaly,” said Janet Yang, an analyst at Morningstar Inc. “It's a surprise to see them change their mind about them.”
Despite Mr. Freadhoff's contention that the industry is clamoring for funds that are adjusted to accommodate for changing market conditions or the passage of time, some advisers are skeptical.
“These prepackaged deals are great for the do-it-yourselfer,” said Eric Toya, vice president of wealth management at Trovena LLC. “But advisers would prefer to advise.”
The problem with funds of funds for most advisers is that the provider usually uses in-house funds as underlying investments, said Steve Rudolph, managing director of HW Financial Advisors.
“We're going to do best-of-breed and try to find the best managers,” he said. “The days of the proprietary-driven strategies are over. It seems like American Funds is catching on very late; it's like they're not listening to advisers. They're out of touch.”
American's Mr. Freadhoff points out that advisers who want to assemble their own portfolios for clients may continue to do so.
"MORE TOOLS'
“Many advisers will decide that the best thing for their client is a portfolio that the adviser puts together,” he said. “We're not taking anything away from that; we're simply giving them more tools.”
Some industry experts see the shift toward products that take care of asset allocation and are managed toward specific goals, such as income or growth, as being the active mutual fund industry's best bet to counter the continuing shift toward passive investments, particularly in equities.
Passively managed mutual funds and exchange-traded funds took in almost $200 billion of net inflows last year, while active products lost almost $10 billion, according to Morningstar.
That shift has led many fund companies to rethink the way they add value to advisers, said Gary Shub, a manager in the financial services practice at The Boston Consulting Group.
“Firms have to ask themselves if they are a parts provider or a solutions provider,” he said.
Although no mutual fund company has had runaway success using the predetermined-mix approach, there is still a growing interest among investors for those types of products, Mr. Shub said.
Assets in goal-oriented products — such as asset allocation funds, target date funds and target risk funds — have grown to 8% of all mutual fund assets, from 1% in 2002, according to Boston Consulting.
jkephart@investmentnews.com
