American Funds and the Oscars

This essay appeared in Citywire Selector on March 3, 2011. 

It seems that American Funds, the formidable asset manager based in Los Angeles, is having a bit of an odd Oscars moment. They are winning all of the accolades but not seeing the box office sales.

In recent industry surveys and analytical pieces conducted for year end 2010 in the U.S., American Funds comes out on top of the list. They are being touted as #1 (in U.S. markets) in the areas of “consistent, dedicated to advisors, ethical and trustworthy” as ranked by advisors in a recent poll conducted by kasina (http://kasina.com/favision_new.asp). Their placement at the top of the pile is not new; they have been the show to beat for nearly two decades. They have long been the ‘go to’ suite of products for many financial advisors.

In connection with the release of the report, Lee Kowarski, a principal at kasina, stated, “It is critical for asset managers to establish a strong brand, especially in this environment where advisors are concentrating 64.8% of their assets under management with their top three providers…[w]e have observed that a firm’s score on the FA Vision Brand Index is positively correlated with customer advocacy (the likelihood that a customer will recommend the firm), which is a key predictor of flows.”

According to kasina’s poll, American Funds has an industry crushing “FA Vision Brand Index” score of 25.06, – three times higher than Vanguard (8.58), the next highest in the ranking of advisors’ opinions. Simple math (and the correlations that kasina suggest) tell us that American Funds would be flush with inflows; people would be lining up at the red carpet to see them and casting votes with their wallets thrown open.

Nope. Beyond all the well wishes and back patting, things don’t look so good. American Funds are seeing record outflows. They are in fact hemorrhaging and have been since 2008. According to data compiled from Morningstar Direct, they have lost $52,603,000,000 (that is billions) over the twelve months ended January 31 2011 in their U.S. domiciled funds. In 2010, they lost basically what Vanguard took in. Want to guess what business looks like across Europe and in Asia?

Credible arguments for the losses have come to American Funds’ defenses. Some industry pundits argue that the flows are, on a percentage basis, not so significant given the firm’s total AuM. Others have pointed out that the outflows are reportedly concentrated in a couple of distribution channels and therefore not indicative of broader trends. Others suggest that they are not particularly strong in bonds and therefore were victim to their predominantly equity driven business during the flight to quality. Others point out that performance has struggled short term and led to redemptions. Each of these points are more or less spot on but I am not buying the broader argument that this is a momentary lapse for the company. It is the indication of a longer running problem.

For certain, they are a huge company (and in fact part of the larger Capital Group) and not going to disappear overnight by any means. Yet, it is tough to see their growth drivers in the current environment. They have, in recent months, introduced a few new products – something that has not happened in years. But perhaps the indication of a change too late? They have recently been beaten by faster, leaner and/or more innovative shops. As the purveyors of the ‘core’, they have been standing in the middle of the road too long and have failed to keep up with key distribution and product trends. When you stand in the middle of the road too long, you get run over.

I think they better figure out what is really going on instead of listening to people talking about just how lovely their garments are.*

* The “Last Emperor” won 9 Oscars in 1988 and grossed $43,984,230. The emperor with the new clothes in the famous children story was misinformed and took some bad advice.