They kept selling funds through intermediaries, but used technology to improve customer relations. The American Funds website, which catered to advisers, was remade to include information for retail clients as well. And the company developed a platform called North American Distribution Intelligence Augmentation, or Nadia, that draws data from digital traffic, phone calls, and other interactions to help its sales force anticipate client questions and demands from the advisers who sell American Funds.
More important, it found success in selling products designed to achieve specific investor goals, such as saving for a college education or retirement. Last year its 11 target-date retirement funds had net inflows of $22 billion, or $14 billion more than the company as a whole, according to Bloomberg estimates. With $120 billion in assets as of March 31, American’s family of target-date funds is now the industry’s fifth-largest. “People like that simplicity,” Lovelace says. “If you put them in something called the 2050 target-date fund, the label reminds them this isn’t for trading. You hold the 2050 fund because you’re going to be 65 in 2050.”
Last year’s fourth quarter, when U.S. stock indexes dipped into bear market territory, was a big test. The American Funds 2020 Target Date Retirement fund beat T. Rowe Price, Vanguard, and JPMorgan SmartRetirement funds by more than a percentage point, says Jim Scheinberg, chief investment officer of North Pier Fiduciary Management, a Los Angeles consulting company.
Capital Group also found ways to cut costs. It started providing funds that eliminate the upfront sales fees that traditionally induced advisers to sell its products. In January 2017 it began offering “clean shares,” with fees as low as 33¢ per $100, that strip out distribution fees and commissions collected by advisers.
Portfolio managers with opposite views of the same securities exchange them internally, eliminating external transaction fees. When the firm’s 70 traders buy and sell securities externally, they do so in blocks that are small for a company of Capital Group’s size, to avoid influencing market prices unfavorably. The company has invested in Luminex Trading & Analytics LLC and IEX Group Inc., two alternative exchanges that aim to enhance trading efficiency.
Performance is the priority. Net of fees, most American Funds have beaten their benchmarks by an annual average of 1.5 percent over 3-, 5-, 10-, and 20-year periods, according to Armour. “People are too fixated on fees,” he says. “They should be fixated on their total return after all fees.”
That argument has gotten through to some people. Last year, Capital Group attracted $7.8 billion in net new client money. But Vanguard raked in $230 billion, fueled by fees as low as 4¢ per $100 under management—about one-tenth the cost of Capital Group’s cheapest funds. Fidelity Investments, with $2.4 trillion in assets, took the trend to the extreme in August by offering the industry’s first zero-fee indexed mutual funds.
This year the amount of money in passive U.S. equity funds is expected to surpass active funds for the first time, with most new cash flowing into the most basic ETFs, according to Alex Blostein, a Goldman Sachs Group Inc. analyst who follows asset managers and brokerage firms. “For a lot of the population, that’s probably OK,” he says.
For Lovelace, that trend only reinforces his commitment to the research-focused investing style he inherited from his grandfather and father. “This Capital System is different and unique,” he says. “And it works. That’s special. Why would I change that?”
This article provided by Bloomberg News.