Large and in charge.

Even if it hasn't hurt returns, size has an effect on American Funds

EuroPacific Growth.
This fund has effectively managed a large asset base for years, but the degree to
which it dwarfs its peers is stunning. Its asset base has nearly quadrupled over the
last decade. Even though the fund's $112 billion asset base is below its 2007 $129
billion high watermark, that still places it in a league of its own. The fund is now
about twice the size of its next largest peer, Vanguard Total International Stock
Index. This fund is more than triple the size of its next largest actively managed
rival, Fidelity Diversified International.
Such girth does limit the fund's flexibility. Even though its assets are spread across
eight primary portfolio managers, the fund can no longer invest significantly in
mid-cap stocks, which currently stand at less than 5% of assets. In 2002, small-
and mid-cap stocks were about 11% of assets. As assets have grown, so has the
fund's average market cap. It has nearly tripled since 2002 and is now bigger than
90% of its peers.
That said, this large-cap bias hasn't hurt the fund over the previous decade as its
top-decile trailing return shows. That's particularly impressive considering that
small caps and mid-caps have outperformed large caps during that time. The fund
has been helped, though, by its consistent overweighting in emerging-markets
stocks, which have broadly beaten developed-markets issues. Emerging markets,
including South Korea and Taiwan, now consume about 29% of assets, more than
twice the foreign large-blend norm.
Going forward, the fund's large-cap focus could be a boon, as large caps are trading
at relatively cheap multiples versus small-cap stocks. Relative performance should
remain strong then, although an emerging-markets sell-off could hurt the
fund more than most peers. Regardless, asset growth will still bear watching. There
could be diminishing returns to size if the fund must add more managers
and stocks to accommodate asset growth.

Process Pillar: | Kevin McDevitt, CFA 03/15/2011
The fund divides assets among eight portfolio counselors (managers) whose
investment philosophies vary from growth-focused to value-oriented. In the
aggregate, the fund's portfolio is well diversified across countries and sectors, and
its price multiples usually stay close to the category norms. Most of the managers
like to hold stocks for the long haul. The fund's turnover is typically well below
average. It may invest up to 25% of assets in emerging markets, and that
weighting has historically been 15%-25%.
People Pillar: | Kevin McDevitt, CFA 03/15/2011
Like all American Funds, this offering boasts eight experienced managers, most of
whom have been with the company for more than a decade. Each manager runs
his or her portion of assets independently of the others. A portion of the portfolio
(less than 25% of assets) is run by the firm's analyst staff. The managers are
evaluated over four- and eight-year periods.
Parent Pillar: Positive | Janet Yang, CFA 07/19/2013
The deep roots of American Funds' more than 80 years of investing success are
many and intertwined, though for the most part, they can be traced to a few
sources: the firm's trademark multimanager system; a stable and long-tenured
team of investment professionals; and an incentive system that allows those
professionals to take the long-term view in an increasingly myopic market.
Combined, American and its parent company, Capital Group, have leveraged those
characteristics to impressive results, particularly on the equity side of their
business, where the vast majority of American's assets under management reside.
The firm's fixed-income efforts haven't always enjoyed the same level of
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performance success. American continues to search for ways to adapt its
multimanager process to the bond markets, and while there are signs that the firm
remains several years behind its similarly resourced peers, recent high-level,
outside hires bring with them the possibility that it will not take as long to catch up
with the competition.
Other aspects of the business have been changing too, including new product
launches and adjustments to the firm's organization. Overall, though, combined
with the firm's unique manager incentives and peer-beating fees, American Funds
remains a model steward of investor assets.
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