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Monday, January 16th, 2012
reversal of fortune

In a period when money has been pouring out of actively managed equity mutual funds, the poster child is the Growth Fund of America (AGTHX).  The hard facts were in a recent InvestmentNews article.  The bottom line:  More than $33 billion in outflows last year.

The general movement of money toward index funds and ETFs hurt, of course, as did the recent sloppy performance of AGTHX.  But the key to the thumping is found in the period from 2001 to 2006, when the fund was in the top quartile every period and was the favorite of fund rating firms, journalists, and, especially, financial advisors.  You can see the dollars that piled up during that time, just in front of a drawdown that exceeded fifty percent.

In general, I urge investors to take advantage of situations when a firm that is likely to deliver strong performance over time has stumbled a little.  The Capital Group, which manages the American Funds, has been one of the most admired investment companies for years.  I can’t speak to its current operations, but it’s the kind of firm that has delivered solid results over time, as is evident in the top panel of the chart.  I’m sure that’s what has motivated Morningstar to give it a forward-looking Silver rating in its new system (as opposed to three stars awarded based upon historical performance).

For someone like me who loves to do due diligence, it would be a very interesting exercise to really look under the hood of this one.  Barring that, you shouldn’t blindly take a chance on it — and you definitely shouldn’t do so in ways that unnecessarily line a financial advisor’s pockets, such as paying the high sales fees that are found on many classes of this and other mutual fund products.

The other thing to keep in mind is that big funds under pressure need to constantly sell the stocks that they like, which can hinder the performance of a fund, since it can’t get out of its own way.  (Chart:  Bloomberg terminal.)