This Gold-rated fund may be a bit old-fashioned, but its discipline helps it hold up when markets are at their worst.
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By Alec Lucas | 02-12-17 | 05:00 AM | Email Article

The following is our latest Fund Analyst Report for American Funds Washington Mutual . Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Alec Lucas is a senior analyst covering equity strategies on Morningstar’s manager research team.

American Funds Washington Mutual earns a Morningstar Analyst Rating of Gold for its ability to hold up well in cratering markets.

The fund once again proved its worth amidst turbulence during the 2015-16 correction. From the S&P 500's July 20, 2015, peak to its Feb. 11, 2016, trough, the fund's 10.7% loss was 2.2 percentage points better than the bogy's. That's impressive given that the fund had a modest overweighting in battered energy stocks, including top-25 positions in  Royal Dutch Shell and  Enbridge . Losing less in corrections and bear markets, such as the 2007-09 credit crisis, has helped the fund post a competitive long-term record. Its 6.5% annualized gain during the past decade through year-end 2016 ranked in the large-value Morningstar Category's top quartile, and its risk-adjusted returns were in line with the S&P 500's.

The fund's robust downside protection is no accident. Its strict investment criteria keep the portfolio centered on investment-grade companies with a long history of paying dividends and strong prospects for continuing to do so. Energy holding Enbridge, for example, plans to acquire fellow oil and gas pipeline company  Spectra Energy in an effort to add a natural gas revenue stream and reinforce its dividend growth.

The fund's value orientation shows in the managers' willingness to buy franchises within out-of-favor sectors. In addition to energy stocks, the managers have found opportunity within the materials sector. Since 2015's fourth quarter, they've kept a top-15 stake in  DuPont , which plans to merge with fellow chemicals firm  Dow  and subsequently split into three separate companies. At year-end 2016, the fund's 17% combined energy and materials stake was 7 percentage points more than the S&P 500's.

The managers' record inspires confidence that they can navigate the dicey parts of the market. So too does their experience: The least-experienced member of the eight-person team has been in the industry for more than 20 years. The fund remains a great option for risk-averse investors.

Process Pillar: Positive | Alec Lucas 01/26/2017
This fund's inclusion requirements are the strictest among American Funds' large-cap offerings, but they've proven their worth and merit a Positive Process Pillar rating. Founded in 1952, the fund's investing criteria are rooted in rules formed in the Great Depression's aftermath to ensure prudent management of trust funds. Potential investments must clear a number of hurdles, including largely shunning the sale of alcohol and tobacco products. Firms must meet New York Stock Exchange listing requirements, even if they are not listed on the exchange. S&P 500 constituents, however, must make up 90% of the portfolio, which naturally leads to extensive overlap with the index. In 2010, American raised the limit on foreign holdings to 10% of assets from 5%, but the fund still remains one of its purest plays on U.S. large-cap stocks.

The fund's focus on income is similarly old-school, as it pursues yield in a disciplined way. It aims for a dividend yield greater than that of the S&P 500, but the fund largely sticks to investment-grade companies with a long history of paying dividends. In fact, only 5% of the portfolio may be invested in non-dividend-paying companies. Plus, firms must have paid their dividends in eight of the past 10 years and earned them in four of the past five years, which generally disqualifies those that have borrowed to cover their dividend in lieu of an earnings shortfall.

This fund has a sturdy portfolio. As of December 2016, its $100 billion average market cap ranks among the large-value category's highest. So too does having 56.4% of assets invested in stocks with a wide Morningstar Economic Moat Rating. Plus, the overall portfolio's average return on assets during the past year ranks within the category's top third. The fund's focus on well-capitalized mega-caps shows in its muted Morningstar Risk ratings for the short and long term.

The fund's dividend requirements can have a big effect on its sector weightings. At year-end 2006, nearly one fourth of the fund's assets were in financials firms that at that point still had histories of steady payouts, like  Bank of America . As the 2007-08 credit crisis deepened, the fund's financials stake fell to a low of 7.5% of assets in mid-2009, as Bank of America and about 20 other financials firms cut or eliminated their dividends and thus dropped off the fund's eligibility list. That kept the fund from buying battered bank stocks, which rebounded strongly in 2009's last three quarters and more recently in late 2016. At year-end 2016, the fund had 11% of its assets in financials, versus 27% for the Russell 1000 Value Index.

The fund's investing criteria also keep it from owning alcohol or tobacco companies. It can, however, hold defense stocks, like  Lockheed Martin , a top-10 name since September 2014.

Performance Pillar: Positive | Alec Lucas 01/26/2017
The fund receives a Positive Performance Pillar rating for its strong record. From longest-tenured manager Alan Berro's July 1997 start date through year-end 2016, the fund's 7.5% annualized gain beat the S&P 500 and typical large-value peer by 0.6 and 1.3 percentage points, respectively, with lower volatility than both.

The portfolio's grounding in mega-cap dividend payers has a big impact on the fund's short-term relative performance. When more speculative fare leads the way, the fund tends to lag. That was the case in the late 1990s, 2009, and 2012. The fund's 12.5% gain in 2012, for example, trailed the index by 3.5 percentage points and finished in the category's bottom quartile.

In turbulent conditions, however, the fund tends to hold up better than most. It outperformed in the early-2000s bear market and the 2007-09 credit crisis, as well as in years in which the market experienced a sharp drop. In 2011, treading lightly in financials helped the fund to a top-decile 7% gain, which beat the index by nearly 5 percentage points. Even with an overweighting in hard-hit energy stocks, the fund again held up well in the 2015-16 correction. Peak (July 20, 2015) to trough (Feb. 11, 2016), its top-quintile 10.7% loss was 2.2 percentage points better than the S&P 500's. The fund's downside protection is impressive considering it remains fully invested by mandate and can't benefit from a cash cushion.

People Pillar: Positive | Alec Lucas 01/26/2017 
American Funds' multimanager approach helps to handle this fund's nearly $90 billion asset base. The fund's Positive People rating reflects its systemic strengths and the managers' experience, ability, and aligned interests.

Capital Group, the parent of American Funds, has split these assets between subsidiaries Capital World Investors and Capital International Investors since early 2014. Longest-tenured manager Alan Berro, who started here in 1997, heads up the whole fund and CWI's team, composed of Gregory Johnson, Jeffrey Lager, David Carpenter, Alan Wilson, and Brady Enright. Eric Stern heads up CII's side, which currently includes only Jin Lee. The managers, based in Los Angeles and San Francisco, each oversee a separate sleeve of the portfolio, with Berro and Stern helping to ensure their investing styles complement one another. For example, Johnson runs a compact, very top-heavy portfolio, while Carpenter's is more diffuse. Seasoned leadership characterizes the combined eight-person group. Lee, whom the firm publicly named in July 2016, is the least experienced manager and yet has more than 20 years of industry experience. The CWI and CII teams are each supported by about 25 analysts. Each analyst group also oversees its own slice of the portfolio.

All eight managers invest in the fund. One invests at least $100,000, four at least $500,000, and three more than $1 million.

Parent Pillar: Positive | 09/30/2015
Capital Group and its subsidiaries, including American Funds, remain among the industry's strongest stewards of investors' capital. The firm boasts experienced and long-tenured investment teams, which have the incentives in place to do right by investors, as well as funds with generally strong long-term track records that are offered at attractive prices. The firm readily earns its Positive Parent rating.

That care and performance have won Capital Group both investors and assets, and the firm is among the world's largest asset managers. Staying on top isn't a forgone conclusion, so the firm has been active in recent years trying to maintain its position. For example, relatively new goals-based funds have helped stem six years of outflows. Expanding its salesforce around the world has also helped, including growing its U.S. wholesaling force by almost a third to 150-strong.

Despite growth in the sales group, investment personnel remain firmly in control of Capital Group's strategic direction. That's apparent in the intensity of resources committed to evolving the firm's signature multimanager system to work better amid a changing fixed-income market. Recent market turbulence suggests the firm's modest goals--for fixed income to be a source of ballast rather than growth--are achievable. Still, investors should follow in the steps of the firm's management team and take the long view to decide how well the changes work.

Price Pillar: Positive | Alec Lucas 01/26/2017
Low fees earn the fund a Positive Price Pillar rating. The A shares' 0.58% fiscal 2016 expense ratio, which applied to more than half of the fund's assets, was 57 basis points below the large-cap, front-load peer median. That easily ranked in the cheapest decile of those peers and was also competitive with the category's better-priced no-load options. Plus, 14 of the fund's remaining 17 share classes sported Morningstar Fee Levels of Low versus similarly distributed rivals. Investors also benefited from modest trading costs, as brokerage fees of 0.02% of average net assets fell below the 0.05% category median.

Securities mentioned in this article



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Alec Lucas does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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