$200 Billion Fund — Growth Fund of America
Kurt Brouwer October 13th, 2007
Now, that’s a milestone. In fact, it’s two milestone. Diya Gullapalli of the Wall Street Journal reports [emphasis added]:
‘Welcome to the era of the $200 billion mutual fund.
In the past few days, American Funds’ Growth Fund of America, or GFA, became the first mutual fund to pass that milestone. Its rapid growth — just three years ago, the fund was less than half the size — raises a host of questions for investors.
The fund’s managers are feeling pressure to close it to new money. At the same time, performance has recently been average after years of outperformance. This month Morningstar downgraded the fund to four stars from five, a quantitative ranking based on risk-adjusted returns.
Passing the $200 billion mark is a big deal in the fund industry, which obsessively watches asset size. Big mutual funds are often cash cows for investment firms, because the costs to run them tend not to increase so significantly after they reach a certain size.
This isn’t the first time a goliath fund wrestled with growing pains. In 2000, Fidelity Investments’ Magellan Fund hit a peak of $110 billion, only to stumble after its star stock-picking manager made some bad choices, and is now around $45 billion.
American Funds executives say GFA will avoid the kinds of problems that Magellan had because the fund is structured differently: Basically, it is broken up among analysts and 10 portfolio “counselors” who can make investment decisions independently of one another.
Still, complaints about size have ramped up recently. Jim Rothenberg, president of Capital Research & Management Co., which runs American Funds, addressed the fund’s ballooning size and complexity in a rare speech this summer. “Size for us is an issue” and “we have spent a lot of energy focused on the challenges” it entails, he said at the time…’
This story illustrates how powerful and attractive the mutual fund structure is. Mutual funds gather assets from many investors, employ a professional portfolio manager, provide a host of services and have audited track records. No wonder they are so popular. And, it’s no wonder mutual fund companies are popular too. Gullapalli continues:
‘…Earlier this year, American Funds became the first fund firm to cross $1 trillion in stock and bond mutual-fund assets, according to Financial Research Corp., which means it is now bigger than Vanguard Group and Fidelity by that measure.
$1 trillion in assets for one mutual fund company. I’m old enough to remember when the whole mutual fund industry was measured in billions, not trillions. However, this story also illustrates the problems that are inherent with popularity. In short, a good fund will eventually get so big it becomes unwieldy. At $200 billion I suspect GFA is at that point. American Funds is a good group and a high quality company, but GFA will no doubt test the company’s ability to manage the conflict that a fund company faces with a very popular fund. Should they shut it down completely to new money and new investors? Or, should they take more limited measures to slow down the rate of growth in new assets? Or, should they just let it run?
- Investing , Mutual Funds
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