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Rating:Morningstar Analyst Offers Free Advice to Capital Group Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, July 20, 2006

Morningstar Analyst Offers Free Advice to Capital Group

by: Sean Hanna, Editor in Chief

It's official: American Funds has replaced Fidelity Investments as the industry behemoth. Proof positive of the development came this week when Morningstar took aim at the Growth Fund of America for "getting too big." That is a criticism commonly heard in the same breath as "Magellan" during the 1990s -- a period of time that we will hereafter refer to as the Fidelity decade.

Magellan solved its size problem the old fashioned way -- it went on a diet and dropped some pounds over the past half decade. That means, of course, that the past six years have quietly compiled themselves into the first half of the American Funds decade (because the Los Angeles-based Capital Group Companie likes to do everything it does quietly).

Though at $142 billion of assets the Growth Fund of America is far larger than Fidelity Magellan was when it was the target of "the fund is too big" criticisms, it ranks only as the eighth largest fund on the market. Still, that did not stop Morningstar analyst Paul Herbert from telling a Bloomberg reporters Matthew Keenan and Danielle Kost that Capital Group should "close the fund or, at the very least, let investors know that they're thinking about it."

For its part, Capital Group seems to disagree. Spokesperson Chuck Freadhoff told Bloomberg that the fund firm has no plans to close any of its 29 funds.

Capital Group does have a different story to tell than Fidelity and Vanguard, two other fund complexes cited as positive examples for closing their funds by the pair of reporters.

For one, Capital Group sells its funds exclusively through brokers unlike both Vanguard and Fidelity which sell their most popular funds directly to investors. In theory, the brokers should be able to judge whether the fund's size is hurting its investment performance and steer their clients clear of it if that is the case (though in practice brokers may be as incapable of resisting the lure of a hot and popular fund as the next guy).

A second point in Capital Group's favor is that its investment structure is scalable (again, this is in theory). By breaking portfolios into chunks and handing those chunks to separate teams of investment professionals, its funds should be able to grow as large as they need to be. Currently Growth Fund claims nine portfolio counselors who together manage between 75 percent to 80 percent of fund's portfolio. The rest is watched over by some 40 analysts who each specialize in an industry. That means there are about 5 stocks in the portfolio for each professional. That is seemingly a manageable quantity.

Time, of course, will tell whether Capital Groups or Morningstar are right.  

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