Money manager takes a beating

Small investors’ reluctance to pump more cash into U.S. stock mutual funds is taking a heavy toll on American Funds, the Los Angeles-based money management giant.

American, the second-largest fund company by assets, saw a net $1.8 billion in cash flow out the door in September as investor redemptions exceeded purchases for the sixth month in the last nine, according to research firm Morningstar Inc.

Year to date through Sept. 30, American Funds suffered a net cash outflow of $19.3 billion, or about 2.2% of its current asset total of $880 billion.

By contrast, No. 1 fund company Vanguard, with $1 trillion in total assets, had a net cash inflow of $74.2 billion in the first nine months, according to Morningstar. Fidelity Investments saw a net $17.2 billion come in the door, and the Newport Beach-based Pimco funds took in a net $55.6 billion.

Vanguard, Fidelity and particularly Pimco have benefited from record demand for bond funds this year, as many individual investors have opted to play it safer with their money rather than risk another huge loss if the stock market should dive again.

But American Funds’ bread and butter has always been stocks. Just 11% of the assets it manages are in its bond funds. So when investors shun stocks, American has a limited menu of other funds to entice them.

Controlled by privately held Capital Group Cos., American relies heavily on brokers and other financial advisors to market its funds.

It doesn’t sell its funds directly to the public except via 401(k) retirement plans. So if advisors are tilting clients’ portfolios away from stocks after last year’s market crash, they may be siphoning cash from American’s funds toward other assets.

An American Funds spokesman declined to comment on the Morningstar data.

Another factor may be hurting American this year: its conservative money management style.

The firm stresses long-term investing and has always followed a “value”-oriented stock-picking discipline. But that means its equity funds tend to lag behind the market when share prices are surging.

Of American’s 10 largest stock and stock-and-bond funds, six trailed the performance of the average fund in their investment category in the first nine months of this year, according to Morningstar. American’s huge Washington Mutual stock fund, for example, was up 10.7%, far behind the 18.6% gain of the average large-stock value fund.

But even beating the market has been no help to some of American’s funds this year. Its Growth Fund of America saw a net outflow of $334 million in September even though the fund has kept pace with the market. Growth Fund gained 27.1% in the nine months compared with a 26.4% return for the average large-stock growth fund.

Because fund companies collect a percentage of assets as their management fee, investor withdrawals cut into fee income. American Funds slashed about 14% of its staff worldwide in two rounds of layoffs in the first half of the year -- the first mass job reductions in the firm’s history -- in reaction to a plunge in assets as stock prices dived from September to March and investors yanked cash.

Redemptions also can hurt a fund’s performance by putting portfolio managers on the defensive -- for example, by forcing a manager to sell stocks in order to have enough cash on hand to meet investors’ requests to exit.

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