Morningstar Advisor - Fall 2008 - (Page 31)

Value and Growth Converge: Holdings Overlap by Percentage of Assets American Mutual vs: AmCap 4.42 | December 1997 24.42 | December 2007 Growth Fund of America 2.86 | December 1997 26.74 | December 2007 New Economy 2.94 | December 1997 14.58 | December 2007 Investment Company of America vs: AmCap 24.21 | December 1997 32.20 | December 2007 Growth Fund of America 22.46 | December 1997 41.61 | December 1997 New Economy 19.83 | December 1997 23.44 | December 2007 Washington Mutual vs: AmCap 6.54 | December 1997 26.32 | December 2007 Growth Fund of America 3.23 | December 1997 30.86 | December 1997 New Economy 4.35 | December 1997 16.73 | December 2007 increase in assets at the funds; that increase may cause the funds to own more of the same stocks and employ more of the same managers (in order to spread the money around). It’s important to keep any such changes in context, as the roller-coaster ride of the equity markets over the past 10 years has resulted in different types and sizes of companies becoming more attractive to managers of certain stripes. More of the Same all but one case, overlap between each of American’s large-value and large-growth funds increased by a double-digit percentage of assets (an average of 20% of assets). The biggest increase was between Washington Mutual and Growth Fund of America, from 3% of assets to 31%. Given the difference between the funds’ objectives, that increase is rather eye-opening. Washington Mutual focuses on firms that pay healthy dividends and avoids those that garner the majority of their revenue from alcohol or tobacco. Growth Fund favors firms that churn out steady earnings growth or are in the midst of a turnaround. Two developments help explain the funds’ rising overlap and the increasing overlap between American’s large-value and largegrowth funds in general. First, after First, let’s tackle holdings overlap. We examined the overlap between each of American’s three large-value funds—American Mutual AMRMX, Investment Company of America AIVSX, and Washington Mutual AWSHX—and each of its large-growth funds—Amcap AMCPX, Growth Fund of America AGTHX, and New Economy ANEFX— as of December 1997 and December 2007. In the late-1990s bull market run of growth stocks and value stocks’ ensuing seven-year rally, valuation disparities between value and growth stocks have shrunk. There are fewer definitive bargains out there, so funds with different objectives—supported, to some degree, by the same analyst staff—are more likely to find the same stocks attractive. Second, there has been an influx of managers at these and other American funds. Because of the dramatic increase in assets, almost all of American’s funds have more portfolio managers at the helm than they did 10 years ago. With more managers overseeing more assets, nearly every fund owns a greater number of stocks. Washington Mutual is an exception to this trend: It’s run by seven managers, the same number that it had a decade ago, and it owns slightly fewer stocks despite a far larger asset MorningstarAdvisor.com 31 http://www.MorningstarAdvisor.com

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Morningstar Advisor - Fall 2008 Contents New on MorningstarAdvisor.com Letter from the Editor Contributors Inbox Are You Preparing for Higher Taxes? State of Financials Oracles of Alabama Investment Briefs Managers’ Investment Secrets Revealed Conformity Becomes a Growing Concern at American Gimme Shelter Location, Location, Location Rooted in Buffett, Going for Growth Keeping Little Company Away from the Numbers Consumer Confidence What about Natural Gas? TIPS to Beat Back Inflation Investing in Hidden Assets Funds That Have an Edge Come Tax Time Mutual Fund Analyst Picks 50 Most Popular Equity ETFs Undervalued Stocks Most Popular Variable Annuities New at Morningstar One for You, 19 for Me

Morningstar Advisor - Fall 2008

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