What should I do with my low performance American Funds?

[prototype]

I currently have about $68K (not Part of a 401K or IRA). Bought summer of 2006 (paid 3.5% front end load because I had bought $100K, but have sold some off since, but not recently) that have had only a 1.5% return since 1/1/11 (total worth was about $67K then). All dividends and capital gains (any capital gains pretty much stopped after 2007) are rolled back in. These 3 funds are about 8% of my total portfolio. I’d like to invest something reasonably stable that return 4 or 5 percent (like my USATX fund did last year).

Capital Income Builder – A (CAIBX) $26K
Capital World Growth and Income Fund – A (CWGIX) $20K
EuroPacific Growth Fund – A (AEPGX) $22K

I don’t need the money right now, and I don’t really need more capitol loss since I have capital loss carryover of about after doing my 2011 returns of about $6K. But 1.5% dragged down my total portfolio return. The options I am considering.
1. Move bulk of the funds into the best performing, most promising of the 3 which is no fee (haven’t done the research on which one of the three that is).
2. Do nothing for now.
3. Withdraw enough to give me another $3K loss or maybe even a $6K capital loss (which fund(s) is TBD, again I would need to do the research), and put the money in a "better place"
Any thoughts, advice, and/or questions would be appreciated.
Thanks

 

[GrayHare]

What are the expense ratios of the funds? IMO anything over 1% is an incentive to move the money elsewhere.

 

[FinanceDude]

What are the expense ratios of the funds? IMO anything over 1% is an incentive to move the money elsewhere.

CAIBX: .61
CWGIX: .79
AEPGX: .82

Disclaimer: I have owned American Funds for almost 20 years, and although the last 3-4 years has not been impressive, I have made a boatload of money in them over that time. That being said, there are a fair number of funds that have done better over that 3-4 year timeframe.....

 

[prototype]

What are the expense ratios of the funds? IMO anything over 1% is an incentive to move the money elsewhere.

Expense ratio
(CAIBX) 0.61%
(CWGIX) 0.79%
(AEPGX) 0.82%

 

[GrayHare]

Those expense ratios are reasonable. Like so many things, fund returns go in cycles, so better performance might be on the horizon. Judging by the fund names, IMO they are reasonable investments at this time.

 

[Telly]

I have both CWGIX and AEPGX. No way will I get rid of them now. Both were Morningstar 4 and 5 star funds for years.

The E/Rs have crept up a bit lately as both have recently shrunken in total assets, with the frenzied flight from equity mutual funds to bonds.

My feeling is, either people believe in asset allocation, or they don't. Seems many out there don't, as the flight from equity to bonds has been extreme.

All 3 funds are foreign equity (CAIBX is a moderate allocation fund), and at least the two I have have significant European exposure. So the present drag on performance due to Europe is not surprising.

The cattle have herded into bond funds. And in x years, when equity is going great guns, they will stampede out of bond funds. I'm staying the course.

Morningstar has commented in the past that they had some concern about the size of some of the American Funds, that they were growing so large that there may not be enough places to invest without swinging the market.

The recent run for the exits has helped that a lot

On asset allocation in general, what was that quote? "If there's a sale at the supermarket, everyone runs in. If there's a sale at the stock market, everyone runs out the door (screaming)".

 

[Nords]

Those expense ratios are reasonable.

Ouch!

Maybe it's worth moving to passive index funds or ETFs that could replicate your asset allocation at a much lower expense ratio.

 

[prototype]

Thanks for all the responses, I think I will do nothing for now and revisit/rethink this one in about 3 or 4 months.

 

[james7]

Thanks for all the responses, I think I will do nothing for now and revisit/rethink this one in about 3 or 4 months.

I think you made the right choice. American Funds have had many high performing funds over the years, but even the best of us stumble at times. Those funds are not a bad place to have your money now and should perform well in the future.

Oh, and don't ever worry about the fund loads and fees; what matters is what you have after all is said and done. Low fees are great for index funds, but you need to pay for active management.

 

[pb4uski]

Ouch!

Maybe it's worth moving to passive index funds or ETFs that could replicate your asset allocation at a much lower expense ratio.

+1, those ERs are higher than I would like.

I think you need to assess the decision in relation to your overall AA across all your investments.

 

[Nords]

Oh, and don't ever worry about the fund loads and fees; what matters is what you have after all is said and done. Low fees are great for index funds, but you need to pay for active management.

You certainly do pay for active management.

I'm skeptical that you outperform.

 

[pb4uski]

....Oh, and don't ever worry about the fund loads and fees; what matters is what you have after all is said and done. Low fees are great for index funds, but you need to pay for active management.

I agree with what matters is what you have after all is said an done.

IF (note; capital I, capital F) an investment manager can consistently beat the index by more than the excess of his funds expenses over the average index fund's expenses then I would be buying active funds.

The problem is there are so few that can do it consistently. So since I am focused on what I have after all is said and done, I buy low-cost index funds.

 

[Midpack]

Unless you're avoiding an untimely (short term esp) capital gain (not the case here evidently), the time to exchange one holding for another is when you're convinced the new holding offers better long term performance net expenses. Losses carry over, and buying high or low washes out, so I'd rather have the better performance sooner, I am missing the benefit to waiting. That said, I've procrastinated before, but it's never proved beneficial in my case. I might as well have just made the move without looking back...and tend to do so.

 

[frequenttraveler]

1. They are all three large cap funds
2. They all three have huge asset bases which may hinder their nimbleness
3. They all 3 have a "World" focus

I would counsel someone who had these 3 funds to diversify a bit, probably into bonds (I realize CAIBX is somewhat of a balanced fund...and I do like that one).

Seems like you have a lot of similarity which in my opinion should be diversified a lot.

 

[LOL!]

1. They are all three large cap funds
2. They all three have huge asset bases which may hinder their nimbleness
3. They all 3 have a "World" focus

I would counsel someone who had these 3 funds to diversify a bit, probably into bonds (I realize CAIBX is somewhat of a balanced fund...and I do like that one).

Seems like you have a lot of similarity which in my opinion should be diversified a lot.

I think this is a standard trick of advisors who push American funds: Make sure to divide up the assets into different funds so that the customer pays more in front-end loads and avoids the breakpoints that give lower upfront loads when one has enough in a single fund.

I would recommend abandoning this fund group and moving the money to low-expense ratio index funds. If the tax hit is too much, then at least stop automatically reinvesting dividends and instead them go into your new passively-managed low-expense ratio index funds.

There is a good reason that American Funds as a group have exhibited outflows. People have seen the light, drunk the Kool-Aid, etc.

 

[Rustward]

I think this is a standard trick of advisors who push American funds: Make sure to divide up the assets into different funds so that the customer pays more in front-end loads and avoids the breakpoints that give lower upfront loads when one has enough in a single fund.

I would recommend abandoning this fund group and moving the money to low-expense ratio index funds. If the tax hit is too much, then at least stop automatically reinvesting dividends and instead them go into your new passively-managed low-expense ratio index funds.

There is a good reason that American Funds as a group have exhibited outflows. People have seen the light, drunk the Kool-Aid, etc.

So what funds would you use, and in what proportions?
It is your 68K to invest.

 

[frequenttraveler]

So what funds would you use, and in what proportions?
It is your 68K to invest.

Not sure this is a general question or specific to this poster, so I will take a quick shot at it.

First, man have you taken a whack on these funds. a 32% loss is just staggering in this short of a time. At the least I would CAN this broker and do it yourself.
1. Keep CAIBX. I HATE load funds, yet this one has been decent; its standard deviation is respectably low (too high volatility can scare folks out of funds they should stay in...a smoother ride can keep an investor on the bus). In addition, it has had a pretty good history of growth in its income stream...again, a positive aspect.
2. Dump the other two. Take the losses and put half the proceeds in...I am ready to get flamed...bond funds. There are tons of them available that are so-called "multi-sector" bond funds that have very strong yields and keep their "duration" low. Look for a duration of LESS than the % yield.
3. Put the other half in a US fund like a Vanguard Wellington, which has again a somewhat balanced portfolio. I really wanted to say Vanguard Wellesley, but Wellesley is conservative and not sure whether it's too tame for you.

You will have capital losses for YEARS unless you get some cap gains down the road.
And again, dump that so-called advisor. Sticking you in three fairly similar world funds is bad bad bad!

I hope this finds you well,
Gray Fox

 

[Rustward]

a 32% loss is just staggering in this short of a time.

Where did you see a 32% loss? He said he sold some.

 

[frequenttraveler]

Where did you see a 32% loss? He said he sold some.

He did; just didn't say how much and how much loss was accrued, so I tossed out a number. In any case, the amount is pretty large considering the time of ownership.

Not sure this changes my overall response a whole lot, though.

 

[LOL!]

So what funds would you use, and in what proportions?
It is your 68K to invest.

I would roll the money into my asset allocation of about 30% US stocks, 30% foreign stocks, 30% bonds, and 10% commercial real state. Specific funds:

VTI, VBR, VXUS, VSS, BND, VCSH. Very simple. Be sure to be tax-efficient in the fund locations. Also these ETFs are just share classes of Vanguard funds, so one can use mutual funds if they do not like ETFs.

See also my market timing newsletter on this forum.

 

[prototype]

Not sure this is a general question or specific to this poster, so I will take a quick shot at it.

First, man have you taken a whack on these funds. a 32% loss is just staggering in this short of a time. At the least I would CAN this broker and do it yourself.
1. Keep CAIBX. I HATE load funds, yet this one has been decent; its standard deviation is respectably low (too high volatility can scare folks out of funds they should stay in...a smoother ride can keep an investor on the bus). In addition, it has had a pretty good history of growth in its income stream...again, a positive aspect.
2. Dump the other two. Take the losses and put half the proceeds in...I am ready to get flamed...bond funds. There are tons of them available that are so-called "multi-sector" bond funds that have very strong yields and keep their "duration" low. Look for a duration of LESS than the % yield.
3. Put the other half in a US fund like a Vanguard Wellington, which has again a somewhat balanced portfolio. I really wanted to say Vanguard Wellesley, but Wellesley is conservative and not sure whether it's too tame for you.

You will have capital losses for YEARS unless you get some cap gains down the road.
And again, dump that so-called advisor. Sticking you in three fairly similar world funds is bad bad bad!

I hope this finds you well,
Gray Fox

Where did you see a 32% loss? He said he sold some.

Let me clarify the 32% loss. I am probably even (give or take a percent or two) with the 3 funds I still have since I bought them back in mid 2006. Of course that is with dividends and gains rolling back in. I did take a fairly big hit when I cashed out about $30K - fundamental investors fund totally and about half of another fund (I can’t remember the name or symbol of that one) . The remaining half of the second one I just moved across the three I kept. The cash outs were at different points in time during the 2009 and 2010 period so that is why I picked up a fair amount of Capital Loss. So maybe it would be simpler to say I started with $70K and am still at about $70K.
I did shift some shares to CAIBX from the other two (not a lot, about $5K total last summer (2011). Anyway I appreciate the input from everybody. I was just very disappointed that these funds didn’t do much in 2011 although they have done better the first 2 months of this year.
BTW – never went to see that broker/advisor again (you get what you pay for and I paid nothing and he made money, and I lost money).

 

[Rustward]

I would roll the money into my asset allocation of about 30% US stocks, 30% foreign stocks, 30% bonds, and 10% commercial real state. Specific funds:

VTI, VBR, VXUS, VSS, BND, VCSH. Very simple. Be sure to be tax-efficient in the fund locations. Also these ETFs are just share classes of Vanguard funds, so one can use mutual funds if they do not like ETFs.

See also my market timing newsletter on this forum.

You don't get to use your asset allocation. The OP said this is only 8% of his portfolio, so you need to match the allocation of what you are taking out otherwise you might unbalance his AA.

All three of these are either international or foreign. So the question becomes: What index funds would you have used for this part of the OP's AA?

 

[Rustward]

Let me clarify the 32% loss. I am probably even (give or take a percent or two) with the 3 funds I still have since I bought them back in mid 2006. Of course that is with dividends and gains rolling back in. I did take a fairly big hit when I cashed out about $30K - fundamental investors fund totally and about half of another fund (I can’t remember the name or symbol of that one) . The remaining half of the second one I just moved across the three I kept. The cash outs were at different points in time during the 2009 and 2010 period so that is why I picked up a fair amount of Capital Loss. So maybe it would be simpler to say I started with $70K and am still at about $70K.
I did shift some shares to CAIBX from the other two (not a lot, about $5K total last summer (2011). Anyway I appreciate the input from everybody. I was just very disappointed that these funds didn’t do much in 2011 although they have done better the first 2 months of this year.
BTW – never went to see that broker/advisor again (you get what you pay for and I paid nothing and he made money, and I lost money).

Thanks for the clarification, prototype.

I am not trying to be ugly here, but you bought at a high (or nearly at a high), then sold a portion of the holding after [-]a severe market dip[/-] things started going down in 2007 then crashed in '08 and '09. Those sells locked in a loss. If you had not sold, you could have ridden it back up, and you would be a little ahead now. It is what it is; not trying to be judgemental, just the facts. And we don't know why you sold, but we don't need to know.

2011 was not a very good year for international or foreign, and you noticed, and are looking at what to do. I believe in another post you have noticed that things may be looking better YTD.

While I would not pay a load, and you could have done better (easy to say on Monday morning after the game), these funds are certainly not dogs. It could have been worse.

Thanks for all the responses, I think I will do nothing for now and revisit/rethink this one in about 3 or 4 months.

This is a very reasonable, cool headed thing to do if you want this exposure to international.

You got caught in the 08/09 crash. I don't know how much difference a fraction of a percentage point difference in expense ratio would have made. Everything got severely beat down.

 

[Rustward]

One more thing: I really do not understand how anybody can seriously compare expense ratios of index funds to expense ratios of actively managed funds. The ER to ER comparison is certainly valid if you are comparing one index fund to another index fund that attempts to follow the same index, but outside that, an ER to ER comparison is really apples to oranges.

 

[Nords]

The ER to ER comparison is certainly valid if you are comparing one index fund to another index fund that attempts to follow the same index, but outside that, an ER to ER comparison is really apples to oranges.

Well, when an index fund does badly at a certain ER, you shrug your shoulders and say "Darn, the market had a bad year."

When an actively-managed fund does badly at 2x ER, you let loose a few pithy curses and fire the manager. Or at the very least, you start a thread on a discussion board to try do decide what to do about it.