Morningstar Advisor - Fall 2008 - 32

Gray Matters Foreign Weightings of American Domestic-Equity Funds Fundamental Investors 15.1 | December 1997 26.0 | December 2007 base. Growth Fund of America, however, now has 11 managers (compared with six in 1997) and holds 280 stocks—double what it held 10 years ago. So the overlap between these two funds is partially driven by Growth Fund’s rapidly expanding asset base (close to $200 billion at 2007’s end). Growth Fund’s overlap with American’s other two large-value funds has also sharply increased over that period. On the other hand, Growth Fund’s overlap with fellow large-growth offerings Amcap and New Economy has dropped slightly. This highlights the other reason Growth Fund looks more like its value-oriented siblings: Its managers have found compelling buys in traditional value sectors such as energy, which has resulted in excellent relative returns over the past decade as value stocks have mostly thrived. Converging Returns distinctiveness is one reason why Morningstar analysts have made this fund an Analyst Pick. As for Growth Fund of America, changes in size and its managers’ preferences are the main factors behind its higher return correlations. It’s difficult to say to what degree each factor has played a part, but advisors should keep these factors in mind when constructing an American Funds portfolio. Growth Fund has recently been less of a diversifier than it had been. The more-sprawling portfolio means that it’s likely to significantly overlap with its large-value siblings— which can lead to higher correlation. American Goes Globe-Trotting Growth Fund of America 7.3 | December 1997 17.7 | December 2007 New Economy 22.5 | December 1997 35.1 | December 2007 AmCap 0.0 | December 1997 2.9 | December 2007 American Mutual 2.7 | December 1997 1.1 | December 2007 Investment Co. of America 9.4 | December 1997 10.9 | December 2007 This increased overlap appears to have had an effect on the correlation between the funds’ returns. We compared the correlations of the three-year returns of the three large-value and large-growth funds with each other for the periods ending December 1997 and December 2007. Although most of the funds didn’t see the correlation between their returns increase significantly over this period, they were more closely correlated over the past three years than the typical large-value and large-growth rivals. (That’s because large-value and large-growth funds moved less in concert over the previous three years than they did in the three years ending in December 1997.) One of American’s funds that bucks this trend is Washington Mutual. Its correlations with each of American’s large-growth funds are below-average relative to the correlations of the broader categories. The fund’s R-squared measures with Amcap, Growth Fund of America, and New Economy for the three years ended in December 2007 were 0.69, 0.69, and 0.63, respectively (1.00 is perfect correlation). Meanwhile, the R-squared of the typical large-value fund with the typical large-growth fund over the same period was 0.72. That During the past 10 years, American has given three domestic-equity funds more opportunity to buy into overseas markets. Fundamental Investors ANCFX, Growth Fund of America, and New Economy all had much bigger stakes in foreign stocks at the end of 2007 than they did in December 1997. For example, New Economy’s non-U.S. weighting jumped to 35% of assets from 23% a decade earlier. American amended the fund’s prospectus to allow for this increase. Meanwhile, American’s four more-sedate domestic-stock funds—Amcap, American Mutual, Investment Company of America, and Washington Mutual—have seen little change to their foreign weightings. As foreign stocks outpaced domestic stocks by hefty margins in recent years, American’s three more-opportunistic funds have thrived. To be sure, each of American’s seven domesticstock funds boasts solid long-term records. But the five-year relative returns of the three adventurous funds beat those of each of the four staid funds. Their 10-year relative returns beat those of three of the four U.S.-heavy funds. It should come as no surprise that the returns of the opportunistic Fundamental Investors, Growth Fund of America, and New Economy correlate more strongly with those of American’s world-stock and foreign-stock funds Washington Mutual 0.0 | December 1997 0.7 | December 2007 32 Morningstar Advisor Fall 2008

Morningstar Advisor - Fall 2008

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