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Investing Specialists

Should American Funds Bring Out More Offerings?

Ideas for funds that could round out American's lineup.

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My colleagues and I at Morningstar have often griped about the desire of some large fund shops to offer as many flavors of funds as they possibly can. Such firms tend to launch specialized funds that take advantage of investors' interest in hot corners of the stock and bond markets--which often subsequently cool, causing trend-chasing shareholders to pull out at the wrong time. What's more, these fund rollouts can result in firms investing where they don't have enough expertise, and prospective investors are left to sift through sprawling, confusing fund lineups.

American Funds, on the other hand, has a compact roster of funds, and the firm deserves kudos for its restraint. The firm has had a loyal following among advisors and investors for a long time, but in recent years, its popularity has surged, and it has vaulted Fidelity and Vanguard to become the largest fund family in the United States. It could have easily capitalized on that success by bringing out all manner of funds, but it hasn't. It has instead preferred to have a few broadly diversified, large funds and devote massive amounts of resources to each one. What's more, American typically likes to bring out funds when it sees more investing opportunities in a particular area. Because the firm has felt that most of its bases have been covered, fund rollouts have been rare in recent years. Indeed, the only funds that American has introduced in the past 14 years (or thereabouts) have been  High-Income Municipal Bond  (AMHIX) in 1994,  New World  (NEWFX) in 1999,  Short-Term Bond Fund of America  (ASBAX) in 2006, and its series of target-date funds last year.

That said, I think the firm could stand to augment its lineup. For example, in the November 2007 issue of this newsletter, I discussed four simple portfolios that American Funds investors could put together to cover most of their equity-investing needs, but I noted that the firm offers only one fund that doesn't invest primarily in large-cap stocks ( Smallcap World  (SMCWX)). All the other funds have at least 70% of their equity holdings plowed into large caps. Might investors benefit from more small-cap options? I'll list my five suggestions for new funds from American below, in order of where American might see opportunities.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.