Morningstar's Kevin McDevitt reports on a visit he made to American Funds in Los Angeles to "take the troubled firm's temperature." He found the company holding steady in the face of massive challenges -- perhaps even too steady.

Despite fours challenging years during which investors have pulled out roughly a quarter of the firm's total assets, McDevitt writes that management at Capital Group, American Funds' parent, has kept a level head.

"You might think that $187 billion in outflows would send shock waves through the entire system, but that hasn't been the case," McDevitt writes. "While the outflows have captured the marketing team's attention, the investment side, particularly within the equity group, has reacted with a collective shrug, believing that its process remains sound."

McDevitt details how Capital has tried to maintain consistency -- keeping the hiring pipeline full, to replace retiring managers -- while also addressing what needs to be addressed. These changes including pushing for closer cooperation between analysts and PMs, an important change given America Funds' system of having PMs work on multiple funds, and using tracking error to monitor the performance of the bond funds.

But what's American Funds' long-term outlook? McDevitt shakes the magic eightball and sees a hazy outlook.

More-conservative mandates and greater risk controls should lead to less volatility, but not necessarily more-competitive long-term results. Ostensibly, the firm's edge used to be credit research, but disappointing performance during the credit crisis and in the early 2000s called that into question. Regardless, Capital is moving in the opposite direction with more emphasis on areas such as duration management and government securities. But the firm still is working through how best to employ these tools within its portfolios.

Read Morningstar's full analysis here. 

Edited by: Chris Cumming


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