The Two Sides of American Funds
Its equity funds are fairly tame, but its bond funds can require more patience.
Investors often look at American Funds as a shop that has not only generated fine long-term performance, but also as one that hasn't taken a lot of risk in the process. I generally agree with this perception. However, it's not completely true, and I think it's a good time to take a closer look at the funds' risk profile--there has been significant carnage in the equity and bond markets since the subprime mortgage meltdown triggered a credit crunch in early 2007. Dicier fare has gotten its comeuppance after enjoying a big four-year surge in the post-bear-market rally.
American's equity funds, which account for more than 90% of American's mutual fund assets, are broadly diversified and tend to avoid extremes. None of them loads up on richly priced fast growers or dirt-cheap, troubled companies. For example, the portfolios of each of American's large-growth funds ( Amcap (AMCPX), Growth Fund of America (AGTHX), and New Economy (ANEFX)) sport below-average valuations, on average, relative to their typical category rival. As a result, only one fund ( Smallcap World (SMCWX)) has an above-average Morningstar risk rating over the 10 years ended March 31, 2008--and that's only because the fund is in a broad category where most funds focus on steadier blue-chip fare.
Watch Out for Credit Risk
However, American's bond funds are generally a bolder bunch. Some of its taxable bond funds, such as Bond Fund of America (ABNDX), tend to own bigger stakes in corporate bonds--an attempt to capitalize on the firm's expertise in analyzing individual companies--and thus often take on more credit risk than their category rivals. As for its municipal-bond funds, both American Tax-Exempt Bond (AFTEX) (its national muni-bond offering) and its single-state siblings dip further down the credit-quality scale, too. The principle is much the same as for the shop's taxable bond funds: American believes it has enough talented investment professionals (more than most shops) to ferret out the most attractive names in dicier areas of the bond market. (It's worth noting that American's bond funds don't take big bets on the direction of interest rates, however.) Thus, the funds have tended to be a bit more volatile than their category rivals over the very long haul. True, there are shorter periods where that isn't the case, but the funds often get hit harder when lower-rated debt hits the skids. One important exception is High-Income Municipal Bond (AMHIX), which tends to own fewer low-quality bonds than its typical high-yield muni competitor and thus provides a smoother ride.
Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.