Posted by: Aaron Pressman on January 2, 2007
It’s that time of year when all manner of predictions are made whilst last year’s are graded. For example, most commentators got small caps wrong in 2006. Defying predictions that the small-cap run of out-performance would end after seven years, the Russell 2000 Index had a total return of 18.37% versus the S&P 500’s total return of 15.79% (figures from Russell and Morningstar, respectively). Another minor upset — value walloped growth as the Russell 3000 Growth Index showed a total return of 9.46% versus the 22.34% gain for the Russell 3000 Value Index.
Mutual fund investors had the same ride, more or less. Among Morningstar category returns “core” large cap funds gained 15.54% versus the 17.05% total return of “core” small cap funds. U.S. value funds returned 24.1%, generally smooshing the 6.83% return of U.S. growth funds. And as everybody knows by now, Bill Miller’s streak of beating the S&P 500 came to an end as his Legg Mason Value Trust (LMVTX) gained just under 6%.
Among the less-commented-upon but far more important trends of the year was the continued success of the American family of mutual funds managed by Capital Research & Management in Los Angeles. With $932 billion under management in stock and bond funds, they’re overseeing better than one out of every eight dollars in mutual funds excluding money market funds, according to Financial Research Corp. in Boston. American has been growing like weeds since the Internet bubble popped, prompting a lengthy string of predictions that the firm couldn’t keep up its performance. Still hasn’t happened. The key to the firm’s success has been spreading fund assets among a multitude of managers, each free to act independently, while keeping expenses low. An emphasis on the value style of analysis, even in its growth funds, has also paid off.
For the year, the mega-titan $161 billion Growth Fund of America (AGTHX) gained 10.94%, beating the average of similar funds by almost 5 percentage points. According to Morningstar the fund outperformed 83% of its peers in 2006 and over the past 10 years has beaten 98%. Likewise, the $28 billion Bond Fund of America (ABNDX) gained 5.9%, better than 93% of its competitors. And the $81 billion Capital Income Builder (CAIBX) added 26.64%, beating 97% of similar world stock funds.
At first glance, the firm’s $95 billion EuroPacific Growth Fund (AEPGX) had a miserable year. Despite gaining 21.87% in 2006, in a strong year for overseas funds, it actually trailed 82% of similar funds tracked by Morningstar. Ouch. A quick look at the fund’s history, however, shows that such under-performance recurs every three or four years. The fund also trailed its peers in 2000 and 2003. Over the past three, five and 10 years, the fund is still in the top 16% or better of its peer group.