Folks,
I am exploring the possibility of investing in American Funds now that they have introduced no-load shares. As am I trying to do my due diligence, I came across the following statement from the website of Capital Group "The Capital Group companies manage equity assets through three investment groups. These groups make investment and proxy voting decisions independently...."
After doing some digging in the fund prospectuses, I found out that the name of the adviser company is Capital Research and Management and the names of the three investment groups are 1) Capital World Investors, 2) Capital Research Global Investors, and 3) Capital International Investors. I think that these three investment groups are separate legal entities, but I am not sure. There does not appear much information on them, other than that they appear to file 13F reports separately.
My question is: why is the adviser structured into three equity investment groups? And why are these groups structured to make independent decisions? I have not seen a structure like this before, but could be wrong. Perhaps other mutual fund companies are using similar structures.
I would appreciate any insights that any of you might have. I find this very confusing.
Thanks,
Alban
Comments
I'm not sure how these 3 firms relate to the overall AF environment, and I'm not sure my comment helps, but hey it works, because I've been a happy AF fundowner for the past 10+ years.
Why not try a question directly to American Funds and ask them? If nothing else that will give you an idea of how they communicate with customers. While I do all of the account management myself directly using their website, the few times that I've needed to communicate with them I did it through our sales rep. If you get any more info, please let us know.
http://www.fa-mag.com/news/capital-group-will-restructure-based-on-investment-objectives-13699.html
Ignoring for the moment that little of the verbiage in the article or prospectus is particularly clear, what I would have guessed is: many mutual fund companies have multiple equity teams where each team manages multiple funds. Those teams tend to be theme based, e.g. large cap, small cap, international, etc. While the names of Capital's equity groups don't suggest that, it is at least consistent with the FA article, that talks about organizing these groups around particular investing objectives.
Regarding AF having "now" introduced no-load shares. They've had no-load shares for many years. What changed is that you're now finding a way to purchase them. But no-load R4 and R5 shares for retirement plans have been around for what seems like forever, with R6 and R5E being added more recently. The F share class (renamed F-1 in 2008) has been around for a couple of decades.
You can get F-2, and sometimes even cheaper R5 or R6 shares through HSA accounts. For example, the HSA Authority offers RERFX.
Most load funds enable brokers to sell their funds without loads so long as the brokers collect fees in some other way. Often, funds will simply waive their loads for fee-based (aka "wrap") accounts. This has been going on since the last century, not just the past decade.
American Funds did this until 2002. Read an older prospectus. It says "Investments made by investors in certain qualified fee-based programs ... may also be made with no sales charge and are not subject to a CDSC".
Read a current prospectus: "You may generally open an account and purchase Class F
shares only through fee-based programs of investment dealers .... These intermediaries typically charge ongoing fees for services they provide. Intermediary fees are not paid by the fund and normally range from .75% to 1.50% of assets annually, depending on the services offered."
Pre-2002, post-2002, same intermediaries, same charges by American Funds. Only the letter attached to the shares changed - from A to F.
So it doesn't look introducing F shares changed anything substantial.
I do agree that, to use a word now in vogue, the "optics" changed. American Funds seems to like the unix philosophy of KISS as much as unix zealots. By that I mean they take it to the extreme. (See, e.g. Rob Pike's "Cat -v Considered Harmful", advocating simple separate programs rather than multiple options on a given program.)
American Funds seems to have taken this approach to heart - instead of having class A shares with different load options (beyond breakpoint pricing), it separated out a no load option into a new share class. Instead of having different options for different uses (retirement plans, 529 plans, retail purchases), it has different groups of shares (R shares, 529 shares, letter shares).
Timing suggests that the introduction of the F shares was a response to the Merrill Lynch Rule (1999-2007) facilitating wrap accounts without holding their reps to a fiduciary standard, but that's purely circumstantial and I can't show a direct link.
https://www.napfa.org/membership/OurStandards.asp
(Anyone remember the 100% No-Load Mutual Fund Council? That vanished about the time American Funds brought out class F shares. It seems the trend at the time was not as simple and "pure" one might wish it were.)
On the investment management side, would there be any way to find more about the three independent equity investment groups that they use? They seem to be more like sub-advisors, but is hard to find more information. My guess is that they divided their equity research group to optimize group interactions and this could help them scale up.
msf I appreciate your unix reference.
I took a quick look at EuroPacific Growth. The first prospectus in which class F shares appear (3/15/2001) shows expenses of 0.46% (management) + 0.25% (12b-1) + 0.21% (other) for a total of 0.92%.
The prospectus from ten years ago (6/1/2006) shows expenses of 0.43% + 0.25% + 0.16% for a total of 0.84%.
The current prospectus (6/1/2016) has class F-1 figures of 0.42% + 0.25% + 0.19% for a total of 0.86%.
It is true that the F (now called F-1) shares tend to run a few basis points higher than class A shares. The difference is entirely in "other expenses", and I've always guessed that's because the share classes hit slightly different target audiences and the servicing costs are slightly different, though not enough to complain about. Maybe expenses have gone up in the past ten years for some other AF funds. Maybe even most of them. But not for my limited sample of 1.
https://www.sec.gov/rules/ic/2012/ic-30150.pdf
In that filing, they say (item #6) that from the investor perspective, "the roles of the Adviser and Wholly Owned Sub-Adviser(s) with respect to the Fund will be substantially equivalent to the roles of an investment adviser and its portfolio-manager employees under a more traditional structure". Exactly what you described. So from the perspective of running the funds, I don't think this structure has any effect whatsoever.
However, one of the exemptions they sought was to avoid reporting how much these subadvisors were paid (under the rationale that, hey, it's all one big Capital Group business, and investors don't care about the internal workings); that's in #5.
Likewise, they don't need to get shareholder approval if a fund switches from one internal subadvisor to another. That's #4.
Finally, here's the SEC response, approving these exemptions:
https://www.sec.gov/rules/ic/2012/ic-30173.pdf
(Excerpt) "ABOUT THE FUND’S WHOLLY-OWNED SUBSIDIARY. The Subsidiary is an exempted company incorporated with limited liability under the laws of the Cayman Islands and is overseen by its own board of directors. The Fund is the sole shareholder of the Subsidiary and it is currently expected that shares of the Subsidiary will not be sold or offered to other investors. If, at any time in the future, the Subsidiary proposes to offer or sell its shares to any investor other than the Fund, shareholders will receive 60 days’ prior notice of such offer or sale and this prospectus will be revised accordingly."
https://www.transamericaannuities.com/media/PDF/MerrillLynch/Prospectus/IRA_Annuity/Oppenheimer-Flexible-Strategies-Fund.pdf
PS: Oppenheimer's operations in many respects offer a stark contrast with those of T. Rowe Price. I've owned a few class A shares there for near 20 years. I'm planning on dumping them in a few more years. I converted to a Roth in early '15 and prefer to leave that money with them until the 5-year holding period is met (just my intent - not a requirement).
The only time I have used American Funds in the last 30 years is with a broker, but I understood then that they were expensive. I NEVER did any better than I would have done in an index fund.
To combat the "passive revolution" they are making a huge push to convince the public that splitting the funds into sleeves will enable them to be nimble and risk conscious.
You have to ask yourself, "why wouldn't I be better off in an Index Fund?" It is almost impossible for any manger running billions ( AWSHX has 84 Billion to move) to beat an index, over a significant period of time. How can you move even 5 billion dollars around in a couple of weeks? So why try?
I have a broker friend who desperately wants me to give him my money to put into American funds.. in the next breath he crows about how much money he has with them and all the bennies that he gets because of this. Where does this money for his free trips etc come from? you and me!
Look at AWSHX over ten years... VFNIX beats it by 5% . VFNIX lost 4% more in 2008 but you are still ahead because of the fees. M* lists AWSHX is a great choice for "risk adverse" investors. Why? Because it lost 33% vs 37% in 2008?
If you want to watch good mangers at work, do some digging into some small funds here at MFO and put some money with someone whose previous results and focus fits with yours... or even better, choose a fund that is totally opposite what you would do because those funds will diversify your investments.
even 0.58% adds up over the years
In those arrangements, the investor's fund invests some or all of its money in one or more other funds as black boxes. Not much different from, say, a large cap fund investing some of its money in Berkshire Hathaway or GE.
In contrast, an American Fund hires one of its subsidiaries to manage the fund's assets. That's like VWELX hiring Wellington Management Company LLP to manage its assets. Admittedly Wellington isn't a Vanguard subsidiary (though it often feels that way
If one (sma3) wants to talk about a company that uses sleeves to manage capacity, look no further than Vanguard. American Funds delegates the management of each fund to a single company, and that company uses multiple managers. In contrast, Vanguard often delegates the management of its funds to multiple companies, each of which in turn divvies up the macro sleeves into micro sleeves.
See, e.g. VWNFX - five management companies, eleven managers in all, if I'm counting correctly. http://financials.morningstar.com/fund/management.html?t=VWNFX®ion=usa&culture=en_US
Yep - not the same. But the wholly owned subsiderary angle caught my attention.
The Cayman Isles have some kind of tax appeal. Pretty sure Sir John used them as a tax haven of sorts when managing Templeton.
Although some might think of American Funds as a "crappy shop" ... not me. I have been one of their investors since my teenage years (now in my late 60's) and I have found their investment services, through the years, to be of good value which has enhanced my financial posture. I am sure there are other fine investment shops as well as not all my money is with American Funds.
And, I have enjoyed reading the recent postings, in this thread, about American Funds and their use of their sleeve management system. Something that I have adopted, of sorts, within my own portfolio.
Please keep those post coming ... As I keep learning more about their marketing and investment techniques with associated expenses. Seems, their success provides something for others to write about stating their views with some these being of good nature.
Will I keep investing in American Funds? You can bet your sweet xxx, I will! From my perspctive they are a good large cap value shop that also offer some good hybrid and asset allocation funds.
Old_Skeet
http://mutualfundobserver.com/discuss/discussion/29858/american-funds-files-for-new-share-class-to-cut-fund-expense-ratios-f-3-shares
Great marketing (agree 100% with BobC on this aspect of AF). Don't think it will significantly affect TCO (total cost of ownership) - I expect it simply to shift costs.
As stated by AF's head of distribution in the article linked to in that other MFO thread:
"This doesn't mean that all of a sudden there will be a significant decline in what's charged to the investor ..."