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All Contents © 2019The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| October 16, 2019
American Funds is the third-largest fund family in the country, with $1.6 trillion in mutual fund assets. Many of its mutual funds are among the biggest in the land, too. So it should come as no surprise that fund company's portfolios are popular in 401(k) plans.
In fact, eight actively managed American Funds portfolios and five of the firm's target-date funds rank among the top 100 funds with the most 401(k) assets – a list prepared by financial data company BrightScope.
You don't read much about American Funds on Kiplinger.com or in Kiplinger's Personal Finance magazine because until recently the firm's funds were sold only through advisers, and with a hefty sales charge, too. At Kiplinger, we favor funds you can buy for no transaction fee. But American Funds recently launched a no-load F1-share class that do-it-yourself investors can buy through a handful of online brokers, including Fidelity and Schwab. (In your 401(k) plan, of course, you don't pay a sales charge to buy shares in any American Funds portfolio.)
American Funds runs its portfolios in a unique way called the Capital System. Managers are encouraged to invest their own money in the funds they run, and most do. Every fund is run by multiple managers – each gets a slice of the fund's assets and applies his or her own style and investment philosophy to choose stocks or bonds. The thinking is, a multimanager approach can enhance diversification, lower overall volatility and drive returns. But as assets have grown, the impact each manager is able to make appears to have diminished, at least in recent years.
Here is our look at the best American Funds options for your 401(k), as well as its other popular offerings that don't quite hit the mark. We analyzed the eight American Funds portfolios, as well as its target-date series, that rank among the top 100 401(k) funds, rating each Buy, Sell or Hold.
Returns and data are as of Oct. 15, unless otherwise noted, and are gathered for the share class with the lowest required minimum initial investment – typically the investor share class or A share class. The share class available in your 401(k) plan may be different.
Expense ratio: 0.66%
One-year return: 5.5%
Three-year annualized return: 12.7%
Five-year annualized return: 10.7%
10-year annualized return: 12.2%
Rank among the top 401(k) funds: #82
Best for: Investors looking for a growth stock fund.
This is the first year American Funds AMCAP has broken the top 100 for funds with the most 401(k) assets. But it's far from the best American Funds offering.
For starters, its six managers invest in large, growing companies that have the potential for continued good future expansion. In other words, the fund invests in the stocks that have led, for the most part, the second half of the bull market. Indeed, AMCAP holds many of the best-performing stocks of the rally – Amazon.com (AMZN), Facebook (FB), Netflix (NFLX) and Microsoft (MSFT) rank among the fund's top 10 holdings.
However, AMCAP's 10-year annualized return, 12.2%, trails the 12.8% annualized gain in Standard & Poor's 500-stock index over the same period. On a year-by-year basis, American's fund lagged the S&P 500 on a total-return basis (price performance plus dividends) in eight of the past 11 calendar years, including so far in 2019.
Still, nervous stock investors may find this fund appealing. It tends to hold up a bit better than its peers in down markets. During the 2007-09 bear market, AMCAP lost 52.7% cumulatively; the typical large, growth fund, 53.0%; and the S&P 500 lost 55.3%.
Expense ratio: 0.57%
One-year return: 9.2%
Three-year annualized return: 9.3%
Five-year annualized return: 8.5%
10-year annualized return: 9.8%
Rank among the top 401(k) funds: #37
Best for: Conservative investors with capital preservation and growth in mind.
Like most so-called balanced funds, American Funds American Balanced typically invests 60% of assets in stocks and 40% in bonds. The 10-manager team can dial risk up or down depending on market conditions, but at any given time, the fund must have at least 50% in stocks or at least 25% in bonds. At last report, American Balanced held 62% in stocks, 33% in bonds and 5% in cash.
On the stock side, the managers focus on blue-chip, dividend-paying companies, including Home Depot (HD) and Intel (INTC). Treasuries, government-guaranteed mortgage debt and investment-grade corporates fill the bond side. The fund yields 1.6%.
Expense ratio: 0.76%
Three-year annualized return: 9.9%
Five-year annualized return: 7.5%
10-year annualized return: 7.7%
Rank among the top 401(k) funds: #85
Best for: Low-risk investors who seek exposure to foreign and U.S. dividend-paying stocks.
As its name suggests, American Funds Capital World Growth and Income buys shares in companies all over the globe with the goal of providing capital appreciation and income.
The good news: It has been consistently less risky than its peers – mutual funds that invest in large, growing companies around the world – over the past 15 years.
The not-so-good news: It's just kind of a ho-hum, average choice in this category.
CWGIX invests in well-established foreign and U.S. companies that pay dividends or have the potential to pay them at some point down the line. (It currently yields 1.8%.) Seven managers divide the assets and invest independently of each other. Nearly 46% of the fund's assets are in the U.S., a few ticks above average for the fund relative to the past five years.
Expense ratio: 0.83%
One-year return: 10.4%
Three-year annualized return: 8.4%
Five-year annualized return: 6.1%
10-year annualized return: 5.5%
Rank among the top 401(k) funds: #2
Best for: Conservative investors looking for some foreign-stock exposure.
American Funds EuroPacific Growth Fund, with more than $158 billion in assets, is the country's biggest actively managed foreign-stock fund. More 401(k) money is stashed in EuroPacific Growth than in Vanguard 500 Index (VFIAX).
But it's far from the best American Funds has to offer. Fifteen years ago, AEPGX was a fantastic fund; today, it's merely above-average, and not by much.
Eight managers steer the fund, investing individually according to the Capital System. Overall, the nearly 300-stock portfolio has 61% of assets invested in developed foreign countries and 32% in emerging nations, with the rest in cash. That's a big emerging-markets stake. Vanguard Total International Stock Market (VTIAX), for instance, has roughly 78% of assets invested in developed-market stocks and 22% in EM shares.
EuroPacific Growth veers from its peers in other ways, too. Nearly half of its portfolio is invested in Asia (mostly Japan and China); similar competition has roughly 30% of assets invested in Asia, on average.
We're lukewarm on AEPGX because it's just kind of middling. Retirement savers who hold shares in the fund should take heart: The fund beat its benchmark, the MSCI All Country World Index ex-USA, over the past trailing three-, five- and 10-year periods, as well as seven of the past 11 calendar years (that includes so far in 2019). That's a point in its favor. But compared with other foreign-stock funds that invest in large, growing companies, it has an average record. The fund's 6.1% five-year annualized return, for example, doesn't even rank in the top 50% in its category.
Expense ratio: 0.59%
One-year return: 8.2%
Three-year annualized return: 12.3%
Five-year annualized return: 11.5%
10-year annualized return: 11.6%
Rank among the top 401(k) funds: #71
Best for: Investors willing to take some lumpy years. May be better off in a broad U.S. stock index fund instead.
Over the past decade, American Funds Fundamental Investors has had some standout years. But its lackluster returns in other years – ANCFX has turned in returns that ranked below average or average in six of the past 11 calendar years, including so far in 2019 – have been a drag.
Although the fund's 10-year trailing average return, 11.6%, edges past the 11.4% return of its typical competitor – funds that invest in large company stocks with value and growth characteristics – it ranks in the bottom half of the category. And it lags the 10-year 12.8% annualized return in the S&P 500. Even worse, Fundamental Investors was more volatile than the index over the 10-year period, too.
In other words, investors would have received more bang for their buck in an S&P 500 index fund, and been less stressed getting there, too.
Expense ratio: 0.62%
One-year return: 7.1%
Three-year annualized return: 14.2%
Five-year annualized return: 12.6%
Rank among the top 401(k) funds: #18
Best for: Timid stock investors looking for a smooth ride in U.S. growth stocks.
American Funds The Growth Fund of America has no shortage of investment expertise: 13 managers, with an average tenure of 10 years between them, divide the fund's whopping $186 billion in assets. They work independently, but together build a portfolio of more than 300 stocks in large, growing companies mostly domiciled in the U.S.
For some reason, however – too many cooks in the kitchen maybe – as a group, the experienced stock pickers haven't been able to generate peer-beating returns lately. In eight of the past 11 calendar years (a period that includes the first 10 months of 2019), AGTHX has posted returns below the category average for its peer group: large growth mutual funds.
It's a little odd. After all, Growth Fund of America invests in the usual suspects of tech-related names that its peers own: Amazon.com, Facebook, Microsoft and Netflix are among the fund's top holdings. But Growth Fund of America has held an average of 7% of its assets in energy stocks over the past five years, far more than the typical 1% weight in that sector among its peers. Energy stocks have been mostly a drag since 2014. The fund also has a comparatively small exposure to tech stocks (23% of assets) compared to its peers, which hold 33% of assets in tech shares on average.
However, that might be just the ticket for conservative investors who want to maintain exposure to growth stocks while enjoying a smoother ride.
Expense ratio: 0.75%
One-year return: 12.3%
Three-year annualized return: 13.4%
Five-year annualized return: 11.1%
10-year annualized return: 10.1%
Rank among the top 401(k) funds: #57
Best for: Investors who prefer all-in-one exposure to U.S. and foreign stocks.
American Funds New Perspective invests roughly half its portfolio in U.S. stocks and the rest in foreign shares and cash. That has been a good formula for all world funds lately, including ANWPX, given the extraordinary bull market in U.S. stocks and relative lackluster returns abroad.
But this fund has outdone its peers, too.
In nine of the past 11 calendar years, including so far in 2019, New Perspective has returned more than the average among its competition: funds that invest in large firms all over the world. That certainly puts it among the best American Funds on this list.
Seven managers divide management of the bulging $89 billion in assets between them and pick stocks on their own. Long-term growth is the main objective, but the fund's secondary aim is to invest in companies that have the potential to pay dividends in the future. At the moment, ANWPX yields 0.6%.
One-year return: 11.0%
Three-year annualized return: 13.5%
Five-year annualized return: 11.2%
10-year annualized return: 12.4%
Rank among the top 401(k) funds: #56
Best for: Conservative investors in search of a stable stock fund.
Discipline governs this growth-and-income, large-company stock fund. Among the numerous investing rules that American Funds Washington Mutual Investors' managers must abide by: S&P 500 constituents must make up 90% of the fund, companies must have a steady history of dividend payments, and there can be no tobacco or alcohol producers.
AWSHX's quirky approach holds it back from the kind of outsize returns that some large-company funds can deliver, but Washington Mutual is a decent performer. Over the past decade, its 12.4% annualized return beats 72% of its peers: funds that invest in large companies with both growth and value characteristics. It does, however, trail the S&P 500. The fund yields 1.7%.
Rank Among the Top 401(k) Funds: 2020, #87; 2025, #81; 2030, #67; 2035, #90; 2040, #94
Best for: Moderate investors looking for a solid life-long asset-allocation plan.
Only five American Funds target-date funds have enough 401(k) assets to merit a spot among the top 100 retirement options. But the American Funds Target Date Retirement target-date series overall is solid.
Its glide path – the prescribed blend of stocks, bonds and cash as the fund moves closer to its end point – starts conservatively, with 85% in stocks (mostly in large, growing U.S. firms) for investors with 40 years left in the work force.
That's all part of the plan, says Toni Brown, who leads the retirement strategy group at American Funds. "We intentionally have a relatively conservative position at the beginning so that in a downturn, there's less volatility for younger investors."
American Funds 2030 Target Date Retirement (AAETX), in particular, holds 64% in stocks, 29% bonds and 7% cash. The series continues to shift for another 30 years after the target year, when it ends with roughly 30% in stocks (mostly dividend-paying) and the rest in bonds and cash.