Is a $200 Billion Star a Good Thing?
Welcome to the era of the $200 billion mutual fund. In the past few days, American Funds' Growth Fund of America, or GFA, became the first mutual fund to pass that milestone. Its rapid growth -- just three years ago, the fund was less than half the size -- raises a host of questions for investors.The fund's managers are feeling pressure to close it to new money. At the same time, performance has recently been average after years of outperformance. This month Morningstar downgraded the fund to four stars from five, a quantitative ranking based on risk-adjusted returns.
Passing the $200 billion mark is a big deal in the fund industry, which obsessively watches asset size. Big mutual funds are often cash cows for investment firms, because the costs to run them tend not to increase so significantly after they reach a certain size.
This isn't the first time a goliath fund wrestled with growing pains. In 2000, Fidelity Investments' Magellan Fund hit a peak of $110 billion, only to stumble after its star stock-picking manager made some bad choices, and is now around $45 billion.
American Funds executives say GFA will avoid the kinds of problems that Magellan had because the fund is structured differently: Basically, it is broken up among analysts and 10 portfolio "counselors" who can make investment decisions independently of one another.
Still, complaints about size have ramped up recently. Jim Rothenberg, president of Capital Research & Management Co., which runs American Funds, addressed the fund's ballooning size and complexity in a rare speech this summer. "Size for us is an issue" and "we have spent a lot of energy focused on the challenges" it entails, he said at the time.
In recent years, the firm significantly restructured itself to deal with its fat funds: Four of the firm's mutual funds have more than $100 billion in assets, according to some estimates. The firm's staff has been divided into two groups, dubbed Capital Research Global Investors and Capital World Investors. The goal: Cut down on big group meetings and continue to foster creative thinking.
At first, the changes "gave us pause" because of concern the musical chairs would distract from investment performance, says Katherine Gallagher, a portfolio officer at Standard & Poor's Corp., which reviews funds for clients like retirement plans. But the firm "took a lot of time planning" the reorganization, she says.
The fund's next annual report is due out in a few weeks, which could offer new clues about the success of the reorganization. Last year's annual report was subtitled: "A Look at How GFA Handles Its Own Growth."
Capital Research says its fund hasn't become too unwieldy. It has resisted closing GFA for several reasons. For one thing, much of the fund's growth has come from stock-price gains, amid the booming market of the past few years, rather than from new investor cash, says the company.
In addition, research suggests some funds tend to underperform after closing, which gives fund managers a disincentive to close to new money.
Shutting the fund and starting a clone also isn't an option, since the fund could then "lose economies of scale" that keep its expense ratio low, says American Funds spokesman Chuck Freadhoff. The fund recently charged a 0.62% net expense ratio for its biggest share class and has reduced it in recent years. The average expense ratio for U.S. diversified stock funds is 1.36%.
American Funds executives have said they would consider closing GFA if performance became an issue, and they don't think they're at that point. Still, the fund has trailed some others more recently.
It's "looking merely average for once," according to a recent Morningstar report.
The fund returned 11% last year, which was behind the Standard & Poor's 500-stock index. So far this year it's up nearly 17%, which is well ahead of the S&P 500, but in the 54th percentile compared with other funds that focus on large, fast-growing companies.
American Funds executives say they aren't concerned with such comparisons to other funds since they seek to stick to their objective of finding stocks that offer the best growth of capital. The fund has also posted strong long-term results, returning 11.6% over the past 10-year average period, or more than five percentage points over the S&P 500 in that time.
GFA might not always "lead the pack," but its investing approach "reduces volatility and helps produce good returns over the long term" says Mr. Freadhoff.
Some observers have said GFA's focus in recent years on cheaper "value" areas like energy and industrial stocks could be holding it back slightly. But the fund's breadth makes it tough to generalize such trends.
Earlier this year, American Funds became the first fund firm to cross $1 trillion in stock and bond mutual-fund assets, according to Financial Research Corp., which means it is now bigger than Vanguard Group and Fidelity by that measure.
Passing the $200 billion mark is a big deal in the fund industry, which obsessively watches asset size. Big mutual funds are often cash cows for investment firms, because the costs to run them tend not to increase so significantly after they reach a certain size.
This isn't the first time a goliath fund wrestled with growing pains. In 2000, Fidelity Investments' Magellan Fund hit a peak of $110 billion, only to stumble after its star stock-picking manager made some bad choices, and is now around $45 billion.
American Funds executives say GFA will avoid the kinds of problems that Magellan had because the fund is structured differently: Basically, it is broken up among analysts and 10 portfolio "counselors" who can make investment decisions independently of one another.
Still, complaints about size have ramped up recently. Jim Rothenberg, president of Capital Research & Management Co., which runs American Funds, addressed the fund's ballooning size and complexity in a rare speech this summer. "Size for us is an issue" and "we have spent a lot of energy focused on the challenges" it entails, he said at the time.
In recent years, the firm significantly restructured itself to deal with its fat funds: Four of the firm's mutual funds have more than $100 billion in assets, according to some estimates. The firm's staff has been divided into two groups, dubbed Capital Research Global Investors and Capital World Investors. The goal: Cut down on big group meetings and continue to foster creative thinking.
At first, the changes "gave us pause" because of concern the musical chairs would distract from investment performance, says Katherine Gallagher, a portfolio officer at Standard & Poor's Corp., which reviews funds for clients like retirement plans. But the firm "took a lot of time planning" the reorganization, she says.
The fund's next annual report is due out in a few weeks, which could offer new clues about the success of the reorganization. Last year's annual report was subtitled: "A Look at How GFA Handles Its Own Growth."
Capital Research says its fund hasn't become too unwieldy. It has resisted closing GFA for several reasons. For one thing, much of the fund's growth has come from stock-price gains, amid the booming market of the past few years, rather than from new investor cash, says the company.
In addition, research suggests some funds tend to underperform after closing, which gives fund managers a disincentive to close to new money.
Shutting the fund and starting a clone also isn't an option, since the fund could then "lose economies of scale" that keep its expense ratio low, says American Funds spokesman Chuck Freadhoff. The fund recently charged a 0.62% net expense ratio for its biggest share class and has reduced it in recent years. The average expense ratio for U.S. diversified stock funds is 1.36%.
American Funds executives have said they would consider closing GFA if performance became an issue, and they don't think they're at that point. Still, the fund has trailed some others more recently.
It's "looking merely average for once," according to a recent Morningstar report.
The fund returned 11% last year, which was behind the Standard & Poor's 500-stock index. So far this year it's up nearly 17%, which is well ahead of the S&P 500, but in the 54th percentile compared with other funds that focus on large, fast-growing companies.
American Funds executives say they aren't concerned with such comparisons to other funds since they seek to stick to their objective of finding stocks that offer the best growth of capital. The fund has also posted strong long-term results, returning 11.6% over the past 10-year average period, or more than five percentage points over the S&P 500 in that time.
GFA might not always "lead the pack," but its investing approach "reduces volatility and helps produce good returns over the long term" says Mr. Freadhoff.
Some observers have said GFA's focus in recent years on cheaper "value" areas like energy and industrial stocks could be holding it back slightly. But the fund's breadth makes it tough to generalize such trends.
Earlier this year, American Funds became the first fund firm to cross $1 trillion in stock and bond mutual-fund assets, according to Financial Research Corp., which means it is now bigger than Vanguard Group and Fidelity by that measure.
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