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Rating:American Funds: Too Popular for Their Own Good? Not Rated 5.0 Email Routing List Email & Route  Print Print
Tuesday, June 29, 2004

American Funds: Too Popular for Their Own Good?

Reported by Theresa Sim

May fund flow data supports what everyone in the industry already knows -- the American Fund family is number one. The patriotically-named fund family has gathered $43.8 billion in assets this year alone, outpacing Vanguard by 28 percent and Barclays Global Investors by 58 percent, according to data from Financial Research Corporation.

This outstanding success, however, may be the cause of increased attention from many fronts, including regulators.

Citing unnamed sources, the NY Times reported on Monday that the SEC is paying attention to the low-profile fund firm -- the agency is investigating directed brokerage practices at the fund family.

On the American Funds website, officials explained their directed brokerage practices: "Capital Research and Management Company, seeks best execution in its portfolio transactions, taking into account cost, price and quality of executions."

They continued, "our investment adviser has until recently taken into account sales of fund shares in selecting broker-dealers to execute portfolio transactions… We no longer take sales of the American Funds into account in selecting broker-dealer firms to execute portfolio transactions for the funds. This is consistent with an SEC proposal to modify the rules so that funds would no longer be allowed to consider sales in allocating portfolio transactions."

And They Keep Going and Going…
American Funds In Flows In Flows ($Mil)
January 2004 11,698
February 2004 8,937
March 2004 9,134
April 2004 8,678
May 2004 5,397
YTD 2004 43,856
Source: FRC data
The funds are also coming under fire for their burgeoning asset size. Although Capital Research's well-known, but little-imitated, multiple counselor management system allows it to accommodate asset growth, some in the industry wonder if the funds are getting too unmanageably large.

Russel Kinnel of Morningstar comments on the whopping $77.9 billion Growth Fund of America: "Everyone and their brother is buying this fund…at this size, the fund may well lose a bit of its edge."

"[T]oday brokers know that no one gets fired for putting his clients in American Funds, and they can’t get enough of the stuff," Kinnel added about the American Funds Investment Company of America.

As Kinnel points out, even without directed brokerage, American Funds would probably have little difficulty successfully promoting its funds -- the funds are sold because of their commitment to distribution through intermediaries, their adherence to stated investment style and consistency. The fund family is also famously cheap with broker perks -- again, because their products sell themselves.

All of which makes the SEC's inquiries, in honing in on the distribution of the home run funds, a bit ironic. The real risk, however, comes from the attention itself. What else might the SEC uncover in its investigation?

It's tough being popular. 

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