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Who are those guys?By Steven Syre, Globe Columnist, 2/17/2004 This much was clear soon after the wave of mutual fund scandals broke last fall: The bad industry news wasn't going to be bad for every company's business. A flight to quality, the familiar pattern of portfolio managers during times of market trouble, quickly came to define the flow of billions of dollars that investors continued to send to mutual fund companies. That gusher of cash wasn't going to just dry up in the middle of a stock market rally. The short list of big winners was easy to identify by last September. Fidelity Investments, the Vanguard Group, and American Funds all had their reputations intact and lots of big, popular mutual funds to sell. It wasn't quite so obvious that one company among those three would become the runaway best-seller in the months that followed the first scandals. I'm not talking about the household names of Fidelity or Vanguard. American Funds, a company that stands many of its industry's marketing conventions on their heads, was already enjoying enormous business success over the first eight months of 2003. By the end of the year, its mutual fund assets under management grew by about $160 billion, or nearly 50 percent, thanks to enormous new sales and market appreciation. You can see just how powerful the flight to quality trend turned out to be last fall by measuring net sales, a calculation that adds up new sales of shares and then subtracts the amount redeemed from funds by existing customers. The industry's long-term mutual funds generated net sales of $94.2 billion in the last four months of 2003, according to data from Financial Research Corp. in Boston. Fidelity, Vanguard, and American combined produced net sales of $63.2 billion. That's roughly 67 cents of every net sales dollar. Among the big three, American Funds accounted for $30.4 billion of the total, nearly as much as the $32.7 billion recorded by Fidelity and Vanguard combined. As Butch once asked Sundance: Who are those guys? American Funds, the mutual fund arm of the privately held Capital Group in Los Angeles, doesn't run elaborate ad campaigns, issue many press releases, promote star managers, or churn out lots of new funds for sale (it offers only 29). Many of its funds don't even have consistent brand names. The American funds, sold through brokers and other third parties, have enjoyed a distribution advantage over the past year. Many rivals sold through the same brokers, like Putnam Investments, were badly damaged by scandals in the fall. Fidelity and Vanguard compete with each other by selling directly to customers. But the company was already the fund industry's runaway best-seller in 2003, even before the first whiff of scandal. Chalk that up to products ideally suited for the times, funds that rise to the top of long-term performance lists with unspectacular but consistently above-average annual returns and rarely a bomb. Reliable long-term success has produced a dozen American funds with four- or five-star ratings from Morningstar Inc., another sales tool for brokers. Three American funds manage more than $50 billion each, compared to just one Fidelity fund (the $67 billion Magellan) crossing that threshold today. The Income Fund of America ($58 billion), Washington Mutual Investors Fund ($55 billion), and the Growth Fund of America ($53 billion) each employ the company's typical multimanager system, spreading assets across six to nine different "portfolio counselors." Eventually, size could become a burden for some of the most popular American funds. "With the way American divvies up the assets between managers they may have more scale," says Paul Herbert, a fund analyst at Morningstar. "But there still has to be a question of how much is too much." American Funds has stayed out trouble with regulators so far, but no company should be considered completely safe from investigation. Compensation practices of fund companies doing business with brokers remain a point of interest to the regulators. And then there are simple business realities. The top-selling fund companies change with the trends of the market and it's hard to stay on top for long. But American Funds is going into 2004 as the clear defending champion. Back to Original Article: News You Can Use
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