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Where I have problems with stories like this: (1) How do AF's outflows compare to other similar fund houses? If the trend is from equities to fixed income, than their outflows from equity funds may be in keeping with the overall trend. Possibly, they don't offer the breadth of fixed income products investors desire. As a load house, load-bearing fixed income products are unlikely to have the same appeal for new investors as load-bearing equity funds might.
(2) The other big issue - the elephant in the room - is the aging baby boom population in search of safer alternatives. Perhaps not entirely by coincidence, the first wave began qualifying for Social Security benefits just as equity markets swooned in '08 & early '09. My own allocation to equities has been dropping by 1-2% per year since '08 - NOT because of the market scare (referenced in the article), but due to the perceived need to adjust risk to age. FWIW
To me it all comes down to expenses. Since Jan 2008 American Funds has seen outflows of $200B whereas Vanguard has seen inflows of $452B. It could be argued that most were seeking bond funds since inflows to those have been very high during that period. However American Funds offers a decent range of bond funds themselves.
I think people are just waking up and realizing that paying a 3.75% load and a 0.60% expense ratio on a bond fund that typically yields less than the load annually isn't such a great idea since they can get a similar passive fund with no load and an ER of 0.10%.
A difference between American Funds bond funds and equity funds is that, while much of the money in the bond funds is in Class A shares as you note, that's not necessarily the case for the equity funds.
See, e.g. the SAI for Bond Fund of America (I assume that's the fund you're talking about; the only other fund that meets your load/ER specs is US Government Securities). The vast majority is in class A ($23.7B), with class C having $2.5B, and class F-1 having $1.5B. None of the many other classes has over $1B in investment.
In contrast, consider EuroPacific Growth. While a good chunk of its moneys are in Class A ($31.4B), there's a bigger chunk in the no load classes F-1 ($7.4B), F-2 ($6.0B), R4 ($12.5B), R5 ($14.0B), R6 ($17.6B).
People are not flocking to AF's bond funds, I suspect because they're lousy. The fund you referenced (actually both of the funds meeting your specs) rates only 2*; Bond Fund of America has performed in the bottom decile over the past five years. (Note, this seems strange to me, since it was not in the bottom decile for any of the past dozen years, but that's what M* reports.) The average AF taxable bond fund rates only 2.4 stars.
Capital Group is working to overhaul its fixed income group and the focus of its fixed income funds, as M* has reported. Also reported by Reuters and others. Confirmation that performance is a major issue with these funds.
Reply to @Charles: Back to my original point: The article is slipshod in its attempt to debunk American Funds. Others here have shed light on AF's deficiencies, but my point was (and is) the author should have done this for us. No mention of AF's bond funds anywhere in the article that I can find. Little in the way of specifics regarding how their flows compare to other houses, particularly their load-bearing brethren. Casual reference to a handful of their equity funds with the positive note: "Instead of abandoning American Funds, shareholders should consider new investments (including those holding blue chips)". As for their argument about investor panic related to the '08 experience being a cause, a good high school journalism student could discern as much - and it still wouldn't explain why AF is faring worse than others. Guess I expect more here. Than again, from TheStreet.com? Perhaps not.
Reply to @hank: I share your disappointment with most financial reporting (and unfortunately, most "reporting" in general). Though this article was somewhat short on details, I did not find it quite as weak as so many others that seem to be written to fill column space.
The writer does point out that there has been a general movement from large cap equity to bonds, and from actively managed funds to index funds (including ETFs). He does not talk about how AF's bond funds in particular are doing because the article is about equity funds. He does point out that while there was this trend out of LC equity, it was particularly pronounced with AF, and goes on to describe how AF equity funds differ from those in other families.
In doing so, he talks about AF's equity funds' relatively poor performance, which has since improved. (He does not note that AF's bond funds's performance has been even worse, as that would not explain the outflow from their equity funds; it would only go to explain why AF's bond funds did not benefit from the equity outflow.) He describes AF's conservative nature, and highlights a particular bad move by AF (holding lots of financials). What he doesn't make clear is that many other families (though far from all) made the same misstep in 2008.
The article does not go into nearly as much depth as the M* article I linked to (below) about how Capital Research is changing the way its managers and analysts work on the equity side. But it is not completely lacking in observations about the funds' management style or AF's relative performance. I don't think I'd throw lump it together with so many articles that deserve excoriation.
Reply to @msf: As a long-time American Funds holder I surely agree that their fixed income offerings are really sub-par. However they do have a number of fairly decent equity funds (if you can purchase without the load), some of which are referenced in the article.
YTD their "New Economy" fund has returned 23.8%, Smallcap World Fund 21%, and Capital World Growth and Income is at 19.2%, all with reasonable ERs.
Reply to @msf: I didn't mean to reference any particular fund, I was merely looking for what their load was on their bond funds. And again, to me, that's why they've performed so poorly. With a load of 3.75% and yields being in the mid-2's for the most part, how do you expect them to perform? I'd also assume that's why they get such a bad rating from Morningstar.
The Bond Fund of America's average annual total return on NAV for 5 yrs. is 4.03%. Not great but not THAT bad. However add into that the sales charge (load) and it drops almost 80 basis points per year. THAT's huge in a bond fund especially just due to a load.
As far as their equity funds, I've always though of them as being pretty good except, once again, for their expenses. The reason there's so much money in say EuroPacific's "R" and "F" shares is because it's prominently featured in their 529 plans and many 401k's. I hold it myself in my 401k because once you strip off the 5.75% load of the "A" shares or the outrageous 1.62% ER of the "C" shares and are able to get the very reasonable 0.55% ER of the R-5 shares or even the higher 0.85% of the R-4's, it's actually a great fund.
I don't recall which bond fund has a 2.5% load, but there is one. One can then transfer those shares into an equity fund thereby paying "only" a 2.5% load instead of a 5.75% load.
Reply to @Soupkitchen: You couldn't just transfer shares from one fund to another. You'd have to sell the bond fund and then buy into the equity therefore paying the 5.75%.
Reply to @kv968: You're absolutely correct that M*'s methodology incorporates loads into the star ratings.
FWIW, I've sent a note to M* asking them about a 93rd percentile ranking for a fund that never dipped into the bottom decile on an annual basis (for several preceding years). That said, looking at 5 year returns for intermediate term bond funds, the average annualized return is 6.27%, which does make 4.03% for a bond fund (whose performance figures tend to bunch) look really bad.
Regarding the load - many people use advisors, and those advisors get paid, one way or another. Do it in a wrap account, and you're paying around 1% a year, which makes the 80 basis point drain look like a bargain.
I agree with you that their equity funds are pretty good (and cheap, if you get them in a noload class). And I think that was the point of the article.
Reply to @Soupkitchen: The AF's prospectuses say (this is from EuroPacific, in case it matters): "Generally, you may exchange your shares into shares of the same class of other American Funds without a sales charge. ... Please see the statement of additional information for details and limitations on moving investments in certain share classes to different share classes and on moving investments held in certain accounts to different accounts."
So I believe you are correct. This seems typical for load fund families.
Regarding the 2.5% loads - ignoring 529 share classes, the funds (all A share class) are:
Intermediate Bond Fund of America AIBAX Preservation Portfolio PPVAX Short Term Bond Fund of America ASBAX
Tax-Exempt Preservation Portfolio TEPAX Limited Term Tax-Exempt Bond Fund of America LTEBX Short Term Tax-Exempt Bond ASTEX
There are a number of factors with respect to the load at American Funds. Among these are:
• They keep excellent track of which amounts you have paid a load on, and DO NOT charge a load again if you redeploy those amounts from one fund to another. As msf and Soupkitchen have noted, there may be some additional charge if you trade between fund classes, but personally I have never encountered that situation. kv968 is incorrect in his assertion to the contrary.
• That load diminishes in stages as you increase your holdings at American, and is eliminated entirely if you reach a certain level. All account totals are consolidated for purposes of determining the load. For example, my IRA, my wife's IRA, and our common non-IRA holdings are all lumped together to determine the load threshold. We met the "no load" threshold many years ago, so load is not a factor for us.
• We dropped below the "no load" threshold in 2008 due to the general economic disaster, but American did NOT reimpose a load on our purchases. I thought that this showed a lot of class, personally.
• The ongoing ERs of the various American funds that we have used are very reasonable, and compare favorably with every other fund that we have from every other company that we have used, a possible exception being certain funds of the American Century family. As kv968 notes, the performance of certain American funds is really quite decent if they can be purchased without a load.
We have used the American Fund family for over thirty years, and are generally quite satisfied with the results. In the early years we needed the advice and help of our adviser, as msf mentioned, and we feel that he certainly justified his cut from the load that we paid at that time. We are still quite friendly, and while I have self-directed our fund trades and deployment for many years now he still keeps an eye on things as a double-check to ensure that I don't do anything really silly. Recently, for example, he kept on top of and handled the paperwork for the automatic IRA drawdowns required as my wife and I have reached the IRS threshold ages. Once in a while American Funds will screw up some detail (what to do with those IRA drawdowns, for example) and he is really helpful in taking care of that kind of stuff, keeping me from having to deal with these sorts of issues. All in all, no complaints with respect to American Funds. Could have done a whole lot worse, and in fact did do a whole lot worse before settling in with American Funds.
Reply to @Old_Joe: I stand corrected regarding the paying of a load when exchanging from one fund to another. However I still maintain the opinion that the loads and/or higher-than-normal fees of the "C" class shares are one of the main reasons for the exodus from the fund family.
As you pointed out Joe, the load does diminish as your cumulative holdings increase however by the time you hit that "no load threshold" of $1M you'd have paid approximately $25,187 (2.5%) in load fees (assuming all investments were in "A" shares). Granted that's without your account amount rising on its own due to performance so the number is hopefully lower but that's still a substantial amount.
I understand that the advisors need to be paid in some way and I'm not disputing the fact. However I think the business model of how they get paid (i.e. loads) is a dying breed. With the advent of ETF's and competition between fund families, ETF issuers and discount brokers increasing, the price to invest has been dropping precipitously during the recent past. I also feel more people are becoming DIY'ers and not needing (or should I say wanting?) investment help. And if they do they're more likely to go to a fee-only based advisor, skipping the front-end load and/or higher ER funds of the past to pay for that advice.
Again, I'm not trying to condemn American Funds for their fee structure (actually I've held their New Perspective-ANWPX Fund since my grandmother bought me some at it's inception in 1973 and have been quite pleased with the performance). All I'm pointing out is that the investment landscape, or at least the costs associated with it, has been changing dramatically recently and as investors continually demand lower-cost options, Amercian Funds doesn't seem to fit that bill.
Hi kv- Don't get me wrong on this- I quite agree with everything you are thinking re the American Funds model, and as I've said here a couple of times before I wouldn't recommend American to anyone starting out these days. Times have changed greatly with respect to decent sources of investment information (MFO itself being a great example) and I think that it's perfectly possible to do pretty well on your own. For example, check out the incredibly detailed posting by Charles regarding Asset Allocation Funds.
That wasn't the case in your grandmother's day though, so you were pretty lucky in choosing a grandmom who had the foresight to buy you some ANWPX. Been in and out of that myself over the years, and I agree that it's decent. In our case we had been lucky and done pretty well in some real estate investments, and when those were converted to cash we were able to put a big chunk into American which jumped us over the no-load threshold, so our total load fees were something less than you have calculated.
Comments
(2) The other big issue - the elephant in the room - is the aging baby boom population in search of safer alternatives. Perhaps not entirely by coincidence, the first wave began qualifying for Social Security benefits just as equity markets swooned in '08 & early '09. My own allocation to equities has been dropping by 1-2% per year since '08 - NOT because of the market scare (referenced in the article), but due to the perceived need to adjust risk to age. FWIW
I think people are just waking up and realizing that paying a 3.75% load and a 0.60% expense ratio on a bond fund that typically yields less than the load annually isn't such a great idea since they can get a similar passive fund with no load and an ER of 0.10%.
See, e.g. the SAI for Bond Fund of America (I assume that's the fund you're talking about; the only other fund that meets your load/ER specs is US Government Securities). The vast majority is in class A ($23.7B), with class C having $2.5B, and class F-1 having $1.5B. None of the many other classes has over $1B in investment.
In contrast, consider EuroPacific Growth. While a good chunk of its moneys are in Class A ($31.4B), there's a bigger chunk in the no load classes F-1 ($7.4B), F-2 ($6.0B), R4 ($12.5B), R5 ($14.0B), R6 ($17.6B).
People are not flocking to AF's bond funds, I suspect because they're lousy. The fund you referenced (actually both of the funds meeting your specs) rates only 2*; Bond Fund of America has performed in the bottom decile over the past five years. (Note, this seems strange to me, since it was not in the bottom decile for any of the past dozen years, but that's what M* reports.) The average AF taxable bond fund rates only 2.4 stars.
Capital Group is working to overhaul its fixed income group and the focus of its fixed income funds, as M* has reported. Also reported by Reuters and others. Confirmation that performance is a major issue with these funds.
The writer does point out that there has been a general movement from large cap equity to bonds, and from actively managed funds to index funds (including ETFs). He does not talk about how AF's bond funds in particular are doing because the article is about equity funds. He does point out that while there was this trend out of LC equity, it was particularly pronounced with AF, and goes on to describe how AF equity funds differ from those in other families.
In doing so, he talks about AF's equity funds' relatively poor performance, which has since improved. (He does not note that AF's bond funds's performance has been even worse, as that would not explain the outflow from their equity funds; it would only go to explain why AF's bond funds did not benefit from the equity outflow.) He describes AF's conservative nature, and highlights a particular bad move by AF (holding lots of financials). What he doesn't make clear is that many other families (though far from all) made the same misstep in 2008.
The article does not go into nearly as much depth as the M* article I linked to (below) about how Capital Research is changing the way its managers and analysts work on the equity side. But it is not completely lacking in observations about the funds' management style or AF's relative performance. I don't think I'd throw lump it together with so many articles that deserve excoriation.
YTD their "New Economy" fund has returned 23.8%, Smallcap World Fund 21%, and Capital World Growth and Income is at 19.2%, all with reasonable ERs.
The Bond Fund of America's average annual total return on NAV for 5 yrs. is 4.03%. Not great but not THAT bad. However add into that the sales charge (load) and it drops almost 80 basis points per year. THAT's huge in a bond fund especially just due to a load.
As far as their equity funds, I've always though of them as being pretty good except, once again, for their expenses. The reason there's so much money in say EuroPacific's "R" and "F" shares is because it's prominently featured in their 529 plans and many 401k's. I hold it myself in my 401k because once you strip off the 5.75% load of the "A" shares or the outrageous 1.62% ER of the "C" shares and are able to get the very reasonable 0.55% ER of the R-5 shares or even the higher 0.85% of the R-4's, it's actually a great fund.
FWIW, I've sent a note to M* asking them about a 93rd percentile ranking for a fund that never dipped into the bottom decile on an annual basis (for several preceding years). That said, looking at 5 year returns for intermediate term bond funds, the average annualized return is 6.27%, which does make 4.03% for a bond fund (whose performance figures tend to bunch) look really bad.
Regarding the load - many people use advisors, and those advisors get paid, one way or another. Do it in a wrap account, and you're paying around 1% a year, which makes the 80 basis point drain look like a bargain.
I agree with you that their equity funds are pretty good (and cheap, if you get them in a noload class). And I think that was the point of the article.
So I believe you are correct. This seems typical for load fund families.
Regarding the 2.5% loads - ignoring 529 share classes, the funds (all A share class) are:
Intermediate Bond Fund of America AIBAX
Preservation Portfolio PPVAX
Short Term Bond Fund of America ASBAX
Tax-Exempt Preservation Portfolio TEPAX
Limited Term Tax-Exempt Bond Fund of America LTEBX
Short Term Tax-Exempt Bond ASTEX
• They keep excellent track of which amounts you have paid a load on, and DO NOT charge a load again if you redeploy those amounts from one fund to another. As msf and Soupkitchen have noted, there may be some additional charge if you trade between fund classes, but personally I have never encountered that situation. kv968 is incorrect in his assertion to the contrary.
• That load diminishes in stages as you increase your holdings at American, and is eliminated entirely if you reach a certain level. All account totals are consolidated for purposes of determining the load. For example, my IRA, my wife's IRA, and our common non-IRA holdings are all lumped together to determine the load threshold. We met the "no load" threshold many years ago, so load is not a factor for us.
• We dropped below the "no load" threshold in 2008 due to the general economic disaster, but American did NOT reimpose a load on our purchases. I thought that this showed a lot of class, personally.
• The ongoing ERs of the various American funds that we have used are very reasonable, and compare favorably with every other fund that we have from every other company that we have used, a possible exception being certain funds of the American Century family. As kv968 notes, the performance of certain American funds is really quite decent if they can be purchased without a load.
We have used the American Fund family for over thirty years, and are generally quite satisfied with the results. In the early years we needed the advice and help of our adviser, as msf mentioned, and we feel that he certainly justified his cut from the load that we paid at that time. We are still quite friendly, and while I have self-directed our fund trades and deployment for many years now he still keeps an eye on things as a double-check to ensure that I don't do anything really silly. Recently, for example, he kept on top of and handled the paperwork for the automatic IRA drawdowns required as my wife and I have reached the IRS threshold ages. Once in a while American Funds will screw up some detail (what to do with those IRA drawdowns, for example) and he is really helpful in taking care of that kind of stuff, keeping me from having to deal with these sorts of issues. All in all, no complaints with respect to American Funds. Could have done a whole lot worse, and in fact did do a whole lot worse before settling in with American Funds.
As you pointed out Joe, the load does diminish as your cumulative holdings increase however by the time you hit that "no load threshold" of $1M you'd have paid approximately $25,187 (2.5%) in load fees (assuming all investments were in "A" shares). Granted that's without your account amount rising on its own due to performance so the number is hopefully lower but that's still a substantial amount.
I understand that the advisors need to be paid in some way and I'm not disputing the fact. However I think the business model of how they get paid (i.e. loads) is a dying breed. With the advent of ETF's and competition between fund families, ETF issuers and discount brokers increasing, the price to invest has been dropping precipitously during the recent past. I also feel more people are becoming DIY'ers and not needing (or should I say wanting?) investment help. And if they do they're more likely to go to a fee-only based advisor, skipping the front-end load and/or higher ER funds of the past to pay for that advice.
Again, I'm not trying to condemn American Funds for their fee structure (actually I've held their New Perspective-ANWPX Fund since my grandmother bought me some at it's inception in 1973 and have been quite pleased with the performance). All I'm pointing out is that the investment landscape, or at least the costs associated with it, has been changing dramatically recently and as investors continually demand lower-cost options, Amercian Funds doesn't seem to fit that bill.
That wasn't the case in your grandmother's day though, so you were pretty lucky in choosing a grandmom who had the foresight to buy you some ANWPX. Been in and out of that myself over the years, and I agree that it's decent. In our case we had been lucky and done pretty well in some real estate investments, and when those were converted to cash we were able to put a big chunk into American which jumped us over the no-load threshold, so our total load fees were something less than you have calculated.
Take care, and have a good New Year.