An All-Weather Approach to Growth Investing | Capital Group

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The Growth Fund of America Has a History of Strong Results

An All-Weather Approach to Growth Investing

How should investors think about growth investing in the U.S. as we enter what could be the late stages of an economic and market cycle? In our view, taking a broader and more flexible approach to growth investing can generate better risk-adjusted returns.

By focusing on the potential for capital appreciation in a variety of scenarios, and having the willingness to invest in stocks that may not fit pure growth criteria on metrics such as high price-to-earnings and price-to-book ratios, we believe our growth strategy has the potential to generate stronger returns over different market, business and economic cycles.

Portfolio managers for The Growth Fund of America (GFA) take a flexible, objective-based approach. In addition to investing in growth stocks, managers target cyclical stocks and companies in turnaround situations that may have fallen out of favor. This expanded opportunity set has helped the fund generate strong results over the long term.

Strong Results Investment Results for 20 Years Ended March 31, 2017

gfa-grid-chart

Sources: Capital Group, Morningstar®. Results based on Class F-2 shares.

The Growth Fund of America has achieved strong results relative to market indexes and its average peer in the growth category over a 20-year period. It has shown higher returns with lower volatility than the Russell 1000 Growth Index. Although the fund’s primary benchmark is the S&P 500 Index, we have used the Russell 1000 Growth Index for purposes of this analysis since that is the index most frequently used by investment professionals for the growth sleeve of a portfolio. The fund has also demonstrated better resilience in down markets, or lower downside capture than its peers.

We believe these traits make GFA a good strategy for a core U.S. equity allocation, as well as the growth allocation when investors choose to have a growth and value combination in their U.S. equity sleeve.

To see the benefit that GFA can provide to an asset allocation, we analyzed the impact of adding GFA to a diversified portfolio of 60% stocks (40% U.S. and 20% international) and 40% U.S. bonds. 

Fund objective: The fund’s investment objective is to provide growth of capital.

Distinguishing characteristics: Has the flexibility to invest wherever the best growth opportunities may be.

Hypothetical Portfolio Results for the 20 Years Ended March 31, 2017 (Class F-2 Shares)

Results from a hypothetical portfolio.
Source: Capital Group, based on data obtained from Morningstar.
U.S. fixed income and non-U.S. equity are represented, respectively, by the Bloomberg Barclays U.S. Aggregate Index and MSCI ACWI ex USA. These indexes are unmanaged, and their results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or taxes. Investors cannot invest directly in an index. The portfolios' returns are hypothetical and do not reflect actual results of an investor. An investor's experience in similar portfolios may differ significantly. Portfolios were rebalanced monthly. Sharpe ratio uses standard deviation and excess return to determine reward per unit of risk. The higher the number, the better the portfolio’s historical risk-adjusted performance.
Annualized standard deviation (based on monthly returns) is a common measure of absolute volatility that tells how returns over time have varied from the mean. A lower number signifies lower volatility.

GFA’s managers put great emphasis on a long-term investment horizon, which they view as essential to growth investing. By their very nature, newer ideas and business models and nascent industries will take time to evolve and become established, generating short-term volatility. Managers believe it is critical to have the staying power and conviction in select companies through that volatility in order to generate long-term returns that can meet investor objectives. Reflecting this long-term orientation, the longer the time period, the greater success GFA has had against the Russell 1000 Growth Index.

GFA Has Generated Strong Returns

Percentage of Rolling Periods in Which GFA Outpaced Russell 1000 Growth Index

3-Year

chart-3-year-gfa

5-Year

chart-5-year-gfa

10-Year

chart-10-year-gfa

Average Excess Return in Leading/Trailing Periods (bps)

chart-3-year-bar-gfa
chart-5-year-bar-gfa
chart-10-year-bar-gfa

Leading Periods           Trailing Periods

Sources: Capital Group, Morningstar.
Based on monthly returns for the period of December 31, 1978 (the inception of the Russell 1000 Growth Index), through March 31, 2017. Based on Class F-2 shares.

Although downside protection is often not associated with growth investing, the ability to provide a degree of capital preservation in down-market cycles can yield stronger returns in the long run. GFA’s flexible approach to growth investing and managers’ sensitivity to valuations have resulted in favorable downside capture relative to peers.

Rolling 10-Year Downside Capture vs. Russell 1000 Growth Index

chart-GFA-downside-capture-721x290

Source: Morningstar. Based on monthly returns for the period of December 31, 1978 (the inception of the Russell 1000 Growth Index), through March 31, 2017. Based on Class F-2 shares. Downside capture measures whether a fund outpaced or lagged an index over periods in which the index declined. A value above 100% indicates the fund declined by more than the index over these periods. A value below 100% means the fund declined less than the index. A value of 100% indicates that the fund and index declined equally.

Part of maintaining a long-term perspective is the acceptance that, over the short term, there may be periods when GFA lags growth and broader market indexes. But history shows that GFA has overcome short-term headwinds — including during the years around the financial crisis, when the fund had challenging results. This period weighed on the fund’s Morningstar peer rank for the 10-year period, as seen in the table. However, the fund‘s three- and five-year rankings have rebounded.

Results and Morningstar Rankings for Class F-2 Shares (as of March 31, 2017)

chart-GFA-rankings-721x235

Sources: Capital Group, Morningstar. Rankings are based on the fund’s average annual total returns within the applicable Morningstar category (Large Growth). The Morningstar rankings do not reflect the effects of sales charges, account fees or taxes.

 

 

Standard & Poor’s 500 Composite Index is a market capitalization-weighted index based on the average weighted results of 500 widely held common stocks.

The Russell 1000 Index comprises the 1,000 largest U.S. companies by market capitalization. The Russell 1000 Growth Index contains those securities in the Russell 1000 Index with higher price-to-book ratios and higher forecasted growth characteristics. The Russell 1000 Value Index contains those securities in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth characteristics.

MSCI ACWI (All Country World Index) ex USA is a free float-adjusted market capitalization weighted index that is designed to measure results of more than 40 developed and emerging equity markets, excluding the United States. Results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter.

Bloomberg Barclays U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market.

These indexes are unmanaged, and their results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or taxes. Investors cannot invest directly in an index.

Morningstar data: © 2017 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from this information. Past performance is no guarantee of future results.

Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2017 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC.

Bloomberg® is a trademark of Bloomberg Finance L.P. (collectively with its affiliates, “Bloomberg”). Barclays® is a trademark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Neither Bloomberg nor Barclays approves or endorses this material, guarantees the accuracy or completeness of any information herein and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

The Morningstar Large Value category includes portfolios that invest primarily in big U.S. companies that are less expensive or growing more slowly than other large-cap stocks. Value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow).The Morningstar Large Growth category includes portfolios that invest primarily in big U.S. companies that are projected to grow faster than other large-cap stocks. Growth is defined based on fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields).

Class F-2 shares were first offered on August 1, 2008. Class F-2 share results prior to the date of first sale are hypothetical based on Class A share results without a sales charge, adjusted for typical estimated expenses. Please see americanfunds.com for more information.

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Figures shown are past results and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. View fund expense ratios and returns. 

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. 

Investment results assume all distributions are reinvested and reflect applicable fees and expenses. 

Expense ratios are as of the most recent prospectus. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.