BOSTON May 9 American Funds succeeded for
decades with a simple strategy of dividing its giant funds among
multiple managers who each operated independently.
But the model broke down amid the recent financial crisis,
particularly on the fixed income side, prompting a major
overhaul and the beginning of a move away from fully independent
co-managers on the bond side.
"I'm not sure if we've changed or the world has changed,"
said Dexter Williams, senior vice president of fixed income at
the Los Angeles-based fund firm, one of the oldest U.S. mutual
Under a new strategy, American's flagship fixed income fund,
the $33 billion Bond Fund of America, will now have
several bond sector specialists who will either outright dictate
allocations for the entire fund or "signal" to other team
members about holdings in their area of expertise, Williams
said. The fund will also be much less heavily invested in
corporate bonds in favor of a mix including more government and
Noting that the fund is used in many 401(k) and college
savings plans as a core bond holding, Williams said the changes
were designed to reduce volatility caused by big moves in the
corporate credit sector.
Fund analysts are taking a "wait and see" approach. "We are
certainly watching it closely," said Jeremy Brothers, a mutual
fund analyst at brokerage Raymond James and Associates. "It's a
different fund than it was in 2006 and 2007 leading up to the
The changes come after the fund's disastrous 2008, when it
dropped 12.2 percent, which was followed by another three years
of mediocre performance. The fund trailed 91 percent of similar
funds over the past five years, according to investment
While U.S. investors generally have been pouring money into
bond funds, including $124 billion last year and $241 billion in
2010, they have been exiting Bond Fund of America. Investors
yanked a net $3.5 billion last year and $3.3 billion in 2010,
according to fund researcher Lipper, a unit of Thomson Reuters.
The lack of attractive bond funds, along with poor
performance on the equity side and the increasing popularity of
index funds, has crushed overall flows at American.
A leader in inflows for much of the past decade, American
suffered $83 billion of net outflow excluding money market funds
for the year ended March 31, by far the most of any U.S. fund
family, according to Morningstar. Fidelity Investments was
second with $25 billion of outflow, excluding money market
Some of American's smaller bond funds, such as in the
municipal sector, have posted strong performance and inflows but
not enough to overcome distaste for the flagship, American's
Williams said. "They were overwhelmed by the largest fund on our
fixed income side," he said.
Still, with over $1 trillion of fund assets, American ranked
as the third-largest manager of U.S. mutual funds. Only Vanguard
Group and Fidelity were larger as of March 31, according to
industry trade group the Investment Company Institute.
In the past, American has divided its large funds typically
among six to 12 managers, or "portfolio counselors" as they are
called at the firm, and granted each significant autonomy over a
designated amount of money. American does not disclose the
amount each manager oversees.
On the Bond Fund of America, newly appointed co-managers
Wesley Phoa, a mortgage-backed securities specialist, Mark
Brett, a global bond and currency expert, and Andrew Barth, a
corporate bond expert, are expected to "signal" to other
co-managers how to allocate money to those sectors.
In another new twist, Barth and Phoa will run their segments
jointly, deciding on allocations among Treasuries, corporates
and mortgage-backed bonds. "That's a signal to all the other
counselors," Williams said.
Also, David Daigle, who joined the fund last year, has been
newly named as the designated high yield bond counselor and will
make almost all decisions regarding the entire fund's picks in
that sector, Williams said.
The changes are long overdue, according to financial adviser
Nicholas Olesen at the Philadelphia Group, in King of Prussia,
Pennsylvania. Although he had recommended the fund to some
clients for retirement accounts in the past, Olesen moved them
away in 2007 and 2008.
Now American ought to make similar stricter assignments at
more of its funds, Olesen said. "The markets all have very
different sectors within each asset class and the committee-team
approach spreads everyone out too thin," he said.
But some advisers worry that the new strategy may not fit
with American's traditional strength in fundamental, bottom-up
research. "It tends to require top-down analysis and a macro
approach that is foreign to the American Funds' ethos," said Ray
Benton, an adviser at Lincoln Financial Advisors in Denver.
Improvements cannot come soon enough for American. So far
this year, Bond Fund of America has gained 2.77 percent, lagging
56 percent of similar funds, according to Morningstar.