Buoyed by the firm’s popularity with financial advisers, net inflows at American Funds have dwarfed its competitors’ over the past five years.
SAN FRANCISCO — Buoyed by the firm’s popularity with financial advisers, net inflows at American Funds have dwarfed its competitors’ over the past five years.
But executives at Los Angeles-based Capital Research and Management Co., which manages the nearly $1 trillion fund group, are auguring a changing of the asset-gathering guard by predicting that it is unlikely to match the net inflows of 2005 and 2006 — each of which exceeded $73 billion.
By comparison, Fidelity Investments, the No. 1 U.S. mutual fund firm, nabbed less than $17 billion last year and $7.3 billion in 2005.
If history proves a guide, American Funds could suffer a dramatic reversal of net inflow fortunes, according to Drew Taylor, a vice president and manager of the
analytical-services group at Capital Research.
“Those data points are as cyclical as market results,” he said. “Our five-year relative figures will come right back in line with everyone else.”
But while Mr. Taylor is throwing some cold water on his company’s inflow prospects, analysts, consultants and financial advisers aren’t necessarily buying it.
‘False modesty’
“I think it’s a bit of false modesty,” said Tom Roseen, a Denver-based senior analyst with Lipper Inc. of New York. “I’ve been to the adviser conferences, and American Funds is on the tip of everybody’s tongue.”
American has not seen a dip in inflows so far this year, Mr. Taylor conceded.
This apparent modesty is likely a pre-emptive strike from the famously tight-lipped Capital Research, said Burton Greenwald, a Philadelphia-based mutual fund analyst.
“The fact that they’re talking is indicative of something itself,” he said. “They’re very sensitive that everyone’s waiting for the other shoe to drop. I can’t think of a time when so many broker-dealers raised questions about having so many clients so heavily invested in a single mutual fund sponsor.”
The mind-set of American Funds’ precious few naysayers was provoked by the ugly memory of Denver-based Janus Capital Group Inc.’s comeuppance after the heady late 1990s, but there are major differences, according to Alois Pirker, senior analyst with Aite Group LLC of Boston.
“Unlike Janus, MFS or others, [American Funds] never got caught speeding,” said Bradley Van Vechten, a Tiburon, Calif.-based registered principal affiliated with Linsco/Private Ledger Corp. of Boston and San Diego. He declined to disclose his firm’s assets under management.
Yet executives at American Funds said they are concerned more that newer advisers may be too caught up with the company’s superior five-year returns.
Since the bubble burst in 2001, financial advisers have flocked to American Funds — to regain the trust of clients, they said. After all, American Funds largely dodged the market downturn by eschewing technology stocks.
And by sidestepping the 2001 debacle, American produced the superior trailing five-year returns, which also helped it attract hot money.
For instance, the fund group’s average five-year return of long-term stock and bond funds at the end of 2002 was 3.05%, versus 0.38% for The Vanguard Group Inc. of Malvern, Pa., and 0.53% for Fidelity Investments, according to Morningstar Inc. of Chicago.
By the end of 2006, the average five-year return of American Funds was virtually even with Fidelity’s 7.6%, and both of them trailed Vanguard’s 8.45%.
According to sources at American Funds, who asked to remain anonymous, with returns normalizing, they are on guard against the potentially fickle nature of the thousands of new adviser clients the fund group attracted during a period of superior performance from 2001 through 2005.
Adding to the challenges faced by American Funds — whose wholesalers are considered the best in the industry at hand-holding — is the continued bull market, according to the company.
“We don’t do as well in up markets,” Mr. Taylor said.
But companies such as Fidelity are not counting on bull markets to save them. Rather, they are “Americanizing” by courting advisers more deliberately, according to the analysts.
“There’s an increased focus on advisers” by Fidelity reflected in the approximately 20% jump in wholesalers at the firm to 195 since the start of 2005, said Stephen Austin, a spokesman at Fidelity, adding that executives at his firm declined to comment.
That focus is working. The number of advisers using Fidelity funds jumped to 56,390, from 47,000, Mr. Austin said.
Indeed, some advisers are looking to alternative fund companies.
CFP Thomas S. “Tif” Joyce, whose Sebastopol, Calif., firm, Joyce Financial Management, manages more than $80 million, said he has shed his American Funds holdings in recent years.
Vulnerability seen
Not only are the funds too large to outperform the market significantly, they are vulnerable to outsize underperformance if net outflows reach the gushing stage, said Mr. Joyce, who is affiliated with Linsco.
But Chuck Freadhoff, spokesman for American, said that all fund companies run these risks and that American funds are not strongly correlated to the market.
For instance, the $180 billion Growth Fund of America rose 14.2% in 2005, versus 4.91% for the Standard & Poor’s 500 stock index, and was outpaced by the index last year, 15.78% to 10.94%.
But many advisers who have used American funds for decades believe that it transcends its own minutiae.
“You feel like you walked into a Lexus showroom,” Mr. Van Vechten said. “You say, ‘Hmm, this is pretty elegant.’”
Scott Maclise, a registered representative in San Rafael, Calif., affiliated with LPL, has used primarily American Funds for 25 years. He said he buys the group’s “quiet, calm approach.”
“When you go to their headquarters, it permeates the whole building, said Mr. Maclise, who manages $115 million.
