Big U.S. outflows at American Funds as bonds gain favor

By Ross Kerber

BOSTON, Sept 16 (Reuters) - A returning tide of U.S. money is not flowing into stock-heavy American Funds, an industry report shows.

American Funds of Los Angeles has been a favorite of investment advisers for much of this decade because of its strong equity funds, but outflows from the family totaled $17.4 billion for 2009 through August, by far the biggest drop in the funds industry, according to a report this week by Morningstar Inc .

American Funds was also the most shunned investment family during August as investors withdrew $2.6 billion.

One reason is that investors spooked by choppy stock markets have piled in to corporate and government bond funds this year. At closely held American Funds, part of Capital Group Cos, bond funds make up just 18 percent of total assets of $848 billion.

'Their business is definitely skewed toward equities, which could be problematic this year,' the author of the Morningstar report, Sonya Morris, told Reuters.

Overall, she found more than $226 billion flowed into U.S. open-end funds for the year through August, nearly making up for the $251 billion that investors pulled out of mutual funds during the panicked second half of 2008.

Families better-known for fixed income picked up the most flows including Fidelity Investments and Vanguard Group Inc.

Meanwhile American Funds' bond funds are still dealing with troubles.

Its largest bond fund, the $38.9 billion Bond Fund of America, took in $2.8 billion for the year through August and posted returns that are 1.36 percentage points better than its peers for the year through Sept. 15, according to Morningstar.

But the fund is still hurt by its dismal performance in 2008 due to its exposure to corporate bonds, dragging its one-year return to 3.55 percentage points worse than peers.

American Funds spokesman Chuck Freadhoff said it would not discuss flows but noted some allocations changes of late.

To reduce volatility, for instance, Bond Fund of America held more than 25 percent of its assets in government bonds as of June 30, up from just over 13 percent at the end of 2008.

Steve Cassaday of money manager Cassaday & Co in McLean, Virginia, said he keeps only about $30 million of his firm's $1 billion in assets at American Funds.

Cassaday and other managers say they worry that most of American Funds' best known vehicles have grown too big and forced them to take positions in large companies like Google Inc and Microsoft Corp.

Another money manager, Martin Hopkins of Princeton, New Jersey, said the growth of low-cost exchange-traded funds also may be luring money from American Funds and contributed to its difficulties recovering from a poor showing in 2008.

'They had a bad year in 2008. They were not alone on that, but because of their size it has been much harder to get out of the bad year,' he said.

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