An All American Mutual Funds Investment Strategy.

Compare an Optimized Investment Portfolio made from all American Mutual Funds with Similar Portfolios made from other Mutual Funds and Benchmark Indices

We maintain five of the best-fitting Model Portfolios using all American Fund's mutual funds. It's updated monthly and is part of the Model Portfolio product.

The main purpose is to show how a generic investment portfolio comprised of only American Funds is doing compared to other generic portfolios with similar stock, bond, and cash holdings. It's also for commission-based financial advisors that use them to get better returns with lower risk for their clients than just picking a few American Funds at random willy-nilly.

A Moderate Model Portfolio is a balanced mix of asset classes that an investor with middle-of-the-road investment risk tolerance would use to reduce risk through diversification. The results are updated monthly on the asset allocation tutorial page's table of returns and on the demo for the Model Allocations.

Out of their 22 mutual funds (the rest are just share class duplicates), the American Family of Funds only has eight of the fifteen asset classes used in our regular portfolio models. We then chose the best-performing American mutual fund to represent each asset class used.

Model portfolios like this can be constructed using any family of mutual funds, variable annuities, life insurance policies, 529 plans, or 401(k) / 403(b) options.

Why Pick on American Funds?

We pick on financial advisors using American Funds because it's the most ubiquitous "legal abuse" in the business. It was a valid way of doing things in the Stone Age 80’s and early 90s, but that’s long over. It was a great 20^th century method of investing, but so many new things have been invented for investors that it’s been obsolete for over a decade.

The American family of mutual funds is the Paris Hilton of investing - it spends the most resources on self-promotion and is only famous for being famous. It really has no special or unique talents to speak of, relative to its peers. They were worthy of note back in the 20^th century, but not anymore.

From the investor's point of view, there isn't anything American Funds has or does better than any other mutual fund family. So why are they so popular? It's not because of investment performance.

They're popular because they pay big money to be popular. The one thing American Funds excels in, is doing business the "American way." Which is charging their shareholders high (semi-hidden) fees, and then spending their money on slick advertising, marketing schemes, and kickbacks to Broker Dealers and financial advisors (they don't spend near as much advertising directly to investors as they did when their returns were better, and they've lowered their usury 12b-1 fees in late '11 because of the criticism).

This is something most all fund families do, but they're the best at enticing Registered Representatives (commission-based financial planners) to sell more of their mutual funds than any other mutual fund family. They are also snuggly in the pockets of those who control what investments commission financial planners can sell to their clients – the Broker Dealers. They're also probably one of the leaders when it comes to political contributions too. They’ve known how to "work the system" the best for decades.

When it comes to loads / commissions / sales charges, American Funds are always at the top of the range. Back when everyone was charging 8.5%, so did they. In the 21^st century, the maximum load on a normal mutual fund is 5.75%, which is what American Funds charge. They've always charged as much as possible (until late '11 when they finally set their 12b-1 fees to be in line with the industry averages).

When it comes to 12b-1 fees, the most normal mutual funds charge for their A-shares in the 21^st century is 0.35%. American Funds used to charge 0.30%. The average for most all A-share mutual funds is 0.25%. So on average, they used charge around 20% more 12b-1 fees than other mutual funds. They got tired of having to defend themselves about this in 2011, so now they charge 0.24%, so they can tout that they charge less than competitors.

Who pays for all of this? The shareholders (investors) pay for it via the front-end loads, back-end loads (redemptions fees), and annual 12b-1 fees.

So no matter how you look at it, the cost of ownership for American Funds is about as high as it gets - when it comes to the money that goes to people that don't have anything to do with getting better performance (the fund managers).

When it comes to compensating the people that do the most important work, the mutual fund managers, American Funds are skimpy. The average equity mutual fund manager fee is about 1%. The average for American Funds equity managers are about 0.6%.

So American Funds pays the people that add the most value around 30% less than industry average. Would you be motivated to do an excellent job if you were getting paid 30% less than everyone else doing the same job in your industry? Probably not. Could this explain some of their mediocre performance? Probably.

Their ad slogans aimed at financial planners used to say, "I can sleep well at night knowing my clients’ money is all in American Funds."

Financial planners ended up losing lots of sleep in 2006 after the press wrote about American Fund's underhanded dealings. They detailed how shareholders were being gouged, and how these ill-gotten fees were going right into the pockets of the BDs and advisors that sold them. Many American Funds shareholders called their advisors to complain. Fighting that off consumed most all of their time for over a month. So much for sleeping well. But the investing public went right back to sleep shortly afterwards.

2006 Morningstar comment on American Funds: "It has become clear that brokers at firms such as Edward Jones, Morgan Stanley, and others have sold funds because they have received kickbacks from fund firms to do so. And dozens of fund companies have helped them to create and foster a system in which matching an investor's goals with a particular mutual fund has less to do with the fund's attractiveness and suitability, and more to do with payments from the fund company."

Part of a Business Week article around the same time:

"...nor has American emerged from the fund scandals completely unscathed. It's under investigation by the Securities & Exchange Commission and the California Attorney General's office for allegedly making undisclosed payments to brokerage firms that gave it preferential treatment. American says it did nothing wrong. "We disclosed what was considered an acceptable level at the time," says spokesman Chuck Freadhoff. "The SEC saw our prospectuses and never raised the issue.

American uses that same matter-of-fact logic in its handling of the probes it is facing. Investigators are focusing on two kinds of payments made to brokers. In one, a practice called directed brokerage, the mutual-fund companies' funneled stock trading orders - and fat commissions - to brokerages that sell its funds. Federal and state investigators are also looking into revenue sharing. That's when fund managers rebate a portion of their fees to brokerages, based on how much client money that they put and keep in the fund family. The practice isn't illegal if it's disclosed. But it can encourage brokers to put their clients into funds that rebate the most rather than the ones best suited to their needs."

Their wholesalers (salespeople that travel around trying to get financial planners to use American Funds over other mutual fund families) are the best paid and supported in the business. They give out all kinds of freebies to financial planners when they "play ball." There have been reductions in this type of "schmoozing" over the years as regulations continue to tighten abuse. But it still goes on every day.

If they were to put these resources into actual money management, to have more asset classes, more funds, pay their managers better, and to get better long-term performance, then there wouldn't be much reason to complain. But most of it goes into marketing, sales, and into the pockets of Broker Dealers, wholesalers, and their salespeople.

Broker Dealers lead the parade with their cheerleaders waiving American Funds flags, and their financial planners usually have no choice but to be one of their floats. To be with the parade means one is rewarded in several ways. When one goes against the parade, they are punished in several ways.

Everybody wants to be part of the herd, with the program, and do what everyone else is doing because they think it's easier, more profitable, and safer. Less people in the world they live in are going to give "good soldiers" a hard time if they're going along with the program. So a lot of minor acts of misbehavior, mostly suitability issues, are ignored. Discretions that may have been prosecuted if the financial advisor used a different family of mutual funds are sometimes overlooked when compliance knows the deed was perpetrated using American Funds.

Back in the 20^th century, there was a valid reason to use American Funds because they had the best customer service (most mutual fund purchases were still done through the postal mail directly through the fund company, whereas in the 21^st century it's most always done via discount brokers). Their performance was a lot better too. These days, with the cost of technology so low, and thousands of American customer service and back-office jobs being outsourced to countries like India, most all mutual fund families have similar customer service.

Also the service of a mutual fund family has become irrelevant since large custodians, like Ameritrade, Waterhouse, Scottrade, Fidelity, Schwab and Pershing, now hold most investor portfolios. This means when you want service, you get it from either the custodian, the salesperson or their staff, or their Broker Dealer. DIY investors rarely deal with AF customer service anymore. So even service is not a reason to buy American Funds anymore.

American Funds has not had any real competitive advantage, other than self-perpetuation from the ignorant press and the slickest-looking market brochures, in the 21^st century. They haven't been able to do one thing of any value better than competing families of mutual funds for a long time.

From the financial planner's point of view, that's working on a commission-basis, there are a couple of big advantages in using only American Funds.

First there's the "sales contest." Broker Dealers give all kinds of rewards and freebies to salespeople that sell the most. In some offices, there's even competition charts updated daily, showing whom is winning. The big prize is usually the annual lavish exotic winter cruise vacation in a tropical paradise. They call them conferences, and it's where BD and wholesalers give out praise, applause, and prizes to the top sellers in a Hollywood Oscars-like setting. And don't forget the never-ending sales pitch about how to sell even more next year! Advisors that used more than one mutual fund family, because they want better performance for their clients, are left out because "those product sales credits don't count toward the conference as much as AFs."

The flip side of the sales contest is sales quotas. Financial consultants working on a commission basis have to drum up a minimum amount of brownie points annually, or they're fired. American Funds usually pay the most points per dollar of sale, so they're naturally favored by advisors fighting to survive.

Next, the Broker Dealer is usually more supportive, helpful, and efficient in maintaining a supply of American Funds prospectus, reports, paperwork, and marketing brochures.

When an advisor recommends a mutual fund to a prospect (that pays a commission), they have to give them the current prospectus (and the latest quarterly or annual report) on the spot. These are updated frequently, so keeping the current version for every fund used on hand in the office becomes a chore.

American Funds really only has 22 mutual funds. Most financial planners only use about a dozen or less of those. So limiting their operations to just a few or several mutual funds from one fund family just makes their life a lot easier. Also reps only have to learn how to fill out one mutual fund family's paperwork, and sell from one set of sales brochures.

If investment advisors had to stock their shelves with prospecti from every well-performing mutual fund family they use, it would just be "too much work."

That's right, one of the biggest reasons why American Funds are the best solution to everything, and why investors realize mediocre investment performance, is because their advisors are just too lame to do a couple of extra hour's work per month! To help, we created a

system to maintain prospecti.

In order to get good investment performance for their clients, advisors would first have to stop overselling American Funds. This is a habit just as hard to break as sweets and beer. Then they would have to learn how to pick better mutual funds

(an insurmountable task for the average commission-based financial planner), spend $1,000 per year on the software to do it, spend a few hours per month doing the work, then an extra hour or two maintaining the prospecti farm, paperwork, etc.

Why do all of that work when American Funds are "good enough" and clients' are too ignorant to know if they're getting decent returns or not anyway? After all, client's aren't sticking with the advisor because they're getting great performance, they’re clueless and don’t know any better. They're loyal because the advisor and staff are so friendly, nice, easy to get along with, make everything easy, and are so trustworthy.

Doing the right things would just mean working more and getting paid less. Since few are complaining, and the overseers are happy, why would anyone want to do that? Don’t’ rock the boat.

So a big reason why American Funds continue their lock on the BDs is because they and their reps just don't know any better, don't know how to properly compare investment performance, are lazy, it’s still is the best way to maximize income, habit, it's the path of least resistance that's been working great for over three decades, armies of wholesalers are out schmoozing via free expensive meals and passing out cool stuff daily, and regulators haven't gotten around to doing anything about these types of abuses yet. American Funds makes life wonderful, we’re getting rich, all of the systems are already set up, and everyone is one big happy family, so why change?

Let's put a spotlight on the biggest misconception: That American Funds have any form of superior investment performance.

It's All in the Results

Most of American Funds' 22 mutual funds are just average when performance is properly compared with similar mutual funds and proper benchmarks. No matter how you look at it, they don't suck and they're not great. They're just average, mediocre, or in the middle of the pack. About a quarter are good, half are okay, and a quarter of them are “bad.” These stats, of course, constantly change for better and worse.

None of their mutual funds are super-star performers. Even Morningstar's flawed Star Rating system ranks only about 10% of them (two to three) with five stars at any given time. Every once in a while, they get lucky and have great performance in the short run, like a few months in a row here and there. Then they revert back to mediocre. It’s been like this forever.

American Funds rarely show up in our mutual fund screening process. They don't make it through several filters because of mediocre performance. There was a year or so in the 20^th century when EuroPacific Growth at least showed up in the screens, but since then not one has even came close. This is the bottom line to us (same with Janus BTW).

American Funds have never been good at being pure to asset classes. For example, American Funds calls their #1 fund, American Growth Fund, a U.S. Large-cap Growth fund. In reality (Jan ‘12 using Dec '11 data), it held ~8% in cash, ~2% in bonds, ~16% in foreign investments, ~15% in Value stocks (of all sizes), and ~5% in Mid- and Small-Cap Growth stocks. When you add it up, it holds less than half of the types of securities that its name leads one to believe it holds (growth). This should be over 90%. These numbers change, and Jan ’12 data was okay compared to most months.

This means people trying to use intelligent asset allocation strategies to reduce risk, will have their efforts thwarted by mutual fund managers buying the kinds of stocks they shouldn't be. This increases risk, which results in losing more money than expected when markets go down. More importantly, it means that when Large-cap Growth stocks go up, this fund will greatly lag the rest of the pack. Lack of asset class purity is never a good thing, which is why it's a major part of our mutual fund screening process.

Our Large-cap Growth fund picks, both load and no-load, have consistently outperformed by around 20%. So even their star-performer is easy to beat.

Most of their mutual funds have had way too much money invested into them for way too long. This is because they were recommended over everything else by armies of financial planners for the last 25+ years.

Some say, "American Funds are more conservative." They're mistaking the lack of their funds going up more than markets, and down about the same, as having some superior investment strategy that will result in losing less money in bad markets. As you can see below, this isn't because of some superior conservative strategy. It's from being so bloated that their funds act more like index funds (with loads and high expenses) than regular mutual funds. This may save investors from losing a little here and there in bear markets, but they're going to miss out on profits during bull markets.

These mutual funds have so much money in them that they have to hold a little of most every stock traded. This is known as being "bloated." The result is investment performance that just matches the markets / asset class.

There are charts of Investment Company of America (ICA, their #2 fund) on this Word document

that compares it to the Large-Cap Value Index as far back as Principia goes.

Compare the chart's red and blue lines. They're pretty much identical, meaning ICA's performance is the essentially same as the asset class. This means you could have realized the same, or better (depending on the month), investment performance yourself just by using the asset classes' (Vanguard) index fund, and saved a ton of money in front-end load sales commissions and annual 12b-1 fees.

This illustrates the effects of American Funds being bloated - they have to buy essentially every stock, so it's essentially the same as being an index fund. Why get index fund results when you can easily do much better?

A graph of our current Large-cap Value mutual fund pick is on the second chart on the Word docx. The difference in performance compared to AF ICA over the same time frame would have been $19,590 vs. $13,840. That's around 42% more money! For investors living off their investment portfolio income, that means half again more paycheck. Are you awake now?

The next screen print shows how things stack up apples-to-apples. 100 means worst of all similar funds and 1 is the best of all similar funds.

Three American Funds were in the bottom quartile for last 12 months and three year's returns.

If you reverse the rankings so you’re looking at the top quintile, then about the same amount are ranked in the top quintile. This means they have a few good funds, a few dogs, but the rest (around half) are just average when it comes to investment performance.

About half were in the bottom half for last 12 months returns. So it’s completely normal for around a third to a half of their funds being in the bottom half when compared apples-to-apples to similar mutual funds with the same objectives.

The next screen print shows how their bond funds stacked up against the benchmark, and our current pick. They underperformed by about 25%, which is huge for a boring core bond fund, where you want to park your money to be safe and to get income needed to pay for retirement living expenses.

The next screen print shows how their municipal bond fund did. Pretty much the same story all of the time here too.

The next screen print shows how their emerging markets fund stacked up against the benchmark and our current pick. It underperformed by over 125%.

All of their other enormous mutual funds have the same problems, and a high percentage are in the bottom half when performance is compared correctly to similar mutual funds and their appropriate benchmark index. This means you have a 50 / 50 chance of just matching an index, if you’re lucky.

Their performance gets worse every year as this bloating is continually compounded with way too much new money. New money coming in has to be invested into something, because they can't hold 25% in cash, or their performance would be even worse. They also can't just buy more of the "good stocks" because they would have to file with the SEC if they held more than 5% of a corporation's outstanding stock.

Another problem with bloating is that their funds have to hold way too much in cash, because they can't find any stocks to buy. Three of their 22 funds held over 10% in cash as of the same month. You're not paying the fund managers to put your money in the bank, you're paying them to buy and sell stocks. You hold cash in your account so you can use it when needed, so you don't want more than a couple percent held inside your mutual funds.

Even if their most bloated mutual funds magically were cut in size by half, they would still be enormously bloated. Growth Fund of America fund had more than $55 Billion as of the same month. In order to only have "winning stocks" it would have to shrink that down to under $20 Billion.

You also can't be well diversified by owning several different American Funds, because most have to own the same stocks. So if you buy AMCAP, Growth Fund of America, and New Economy thinking you’re safer because all of your eggs are divvied up between different funds, you are mistaken. Look at the holdings and you’ll mostly the same stocks. The same if you held American Mutual, ICA, and Washing Mutual.

The right thing for American Funds to do is to close bloated load funds to new investors. They should have done this around 1995. But this is a mutual fund family that's only about, "Show me the money," so they'll never do that. Just the fact that they don't close their bloated mutual funds is proof that they care more about maximizing their income than getting above average investment performance for their shareholders. The party raged for a couple of decades using this business model, so why change now? Nobody is forcing them (or can force them), so they never will, making these problems get worse daily.

Their strategy of high-growth of investments under management and constantly collecting even more assets is still going strong. We went to a focus group in 2000 sponsored by people trying to find out how investment advisors select mutual funds. The invitation we received in the mail looked like we were doing the industry some big academic favor. After fishing every detail out of us, like all of the things it would take for a fund company to get more of our assets, they gave us $100 and then told us it was conducted by American Funds. Deceptions like this are just proof that the color of your hat is black.

People have been pointing all of this out for years, so these are not new complaints.

There's only one thing you as an advisor can do about this, and that's to stop selling them. As an investor, they only thing you can do is to sell them and buy better mutual funds (and/or replace your investment advisor ASAP).

Conclusions

The reason few investors know about the mediocre performance, is because nobody has ever listed their problems, or compared them properly before, and posted the results in a place that stays put.

This information is in the media all the time, but only for a week and then it's gone. The only place you'll see the performance of a suitable American Funds portfolio properly compared on a monthly basis is on the table of returns

here.

If mutual fund families were popular based on consistent long-term superior performance, then Wells Fargo, T. Rowe Price, and Oppenhiemer would be the three most popular mutual fund families. They not only have around twice the number of asset classes, and are much more pure to asset classes, but many of their mutual funds are consistent star performers. This is the only way to consistently beat the market indices.

When a financial planner puts fancy sales brochures in front of people new to investing, this and what the salesperson says, are usually all they have to go by. They don't know how to find important information like this. Even if they did, they probably wouldn't understand it. If they did understand it, and contacted their salesperson, all they'd get is, "You're fine, don't worry, go back to sleep, you're investing in America - your mutual funds have had America in their name since the beginning of time! How can you go wrong with America?" Then blah blah blah about how American Funds are the best thing since sliced bread. Even if they wanted to get better mutual funds, they don't know how. Then their attention spans are too short to go through all of that research and paperwork.

So once investors' place their trust into the advisor's recommendations, the commissions are deducted, the deal is done, and the investor is stuck. Then in non-qualified accounts, there are taxes to pay if American Funds were sold to buy better mutual funds (if there's a profit).

Everyone that was sold American Funds by a financial salesperson should do their homework with respect to performance. These days, there is not one reason why American Funds are superior to their competition. The more you do your homework, the more you'll reach the same conclusion.

Then you should question your financial advisor on why you were sold such mediocre-performing mutual funds, which lack the asset classes needed to lower risk through diversification, and have such high costs of ownership.

The truth from your commission-based financial advisor is, "That's how me and my Broker Dealer make the most money from you! Plus I don't know how to do the research to find better-performing mutual funds, my Broker Dealer wants me to use them, I'm way too lazy to maintain a supply of mutual fund prospecti or learn the paperwork for more than one mutual fund family, and they have the fanciest sales brochures to help me close the most deals."

It's hard to teach old dogs new tricks, so the self-perpetuating myth about American Funds being superior will be around for a while longer.

If you don't believe any or all of this is true, then find a seasoned financial advisor that started out in the Broker Dealer commission-based world, then moved up the financial advisor food chain to be a fee-only money manager, and let them tell you their unbelievable stories! That will wake you up for sure.

You should also look into learning how to invest your money yourself. After you get the basics down, you can transfer your American Funds portfolio into a self-directed online discount brokerage account. If you're in a tax-qualified retirement plan (IRA), then you can sell them all and invest the money into better performing investments, and escape all of this forever, without paying any taxes or sales loads.

We think you'll do way better by just investing in an appropriate portfolio of no-load index mutual funds (not ETFs). And we think you'll do even better than that by using our mutual fund recommendations and/or our asset allocation software to invest your own money.

Our bottom-line opinion is that no matter what mutual funds you buy after selling all of your American Funds, it would be hard to do much worse than keeping them. Then it's the 21^st century - so just say no to American Funds. You can and it's easy - just ignore (and fire) the whiny salesperson, and do it ASAP!

All of that is now just an obsolete 20^th century way to invest. You don't use a land-line phone dial-up to connect to AOL to access the Internet anymore, do you? Of course not, it hasn't been the stone-age for going on a decade. Nobody does that anymore. It's the exact same concept. There are way too many better ways to invest to count these days - either by doing it yourself, or by hiring a fee-only or fee-based money manager.

A funny source-less anecdote: “Take a population of our species and give it no sex education, and you'll get teenage mothers and STDs. Take a population and give it no financial education in school, and you'll get American funds. What that’s saying is, If you think education is expensive...."

Download a large Word docx with much more on the subject

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