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RETIREMENT PLAN INVESTOR

Use your plan ID (available on your account statement) to determine which employer-sponsored retirement plan website to use:

IF YOUR PLAN ID BEGINS WITH IRK, BRK, 1, 2 OR 754

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Equities slide amidst global sea change

Some dividend-oriented and conservative funds provided relative resilience


David Polak
Equity Investment Director

Mike Pollgreen
Investment Product Manager

Rising inflation and interest rates have created a tough environment for global equities, but many of our growth and income, equity income, and balanced strategies fared better than their benchmarks.
 

Key takeaways for the quarter ended June 30, 2022
 

  • On the heels of rising inflation and a hastening upward path of interest rates, global equities declined 15.7% in the quarter and 20.2% year to date.
  • While absolute losses are always painful, the equity and multi-asset American Funds held up relatively well against primary prospectus benchmarks, with 13 of 20 outpacing.
  • Our equity income and balanced American Funds displayed the most strength during the quarter—all outpaced their blended benchmarks—as did our more conservative growth-and-income strategies.
  • After severe multiple compression year to date, we believe the market will once again begin to ascribe value to fundamentals and remain optimistic about investing amidst this backdrop.
     

Market review

“The world has changed, and we are living through a pivotal time in history.”
— Rob Lovelace on all-weather investing

In the second quarter of 2022, major equity market indices continued a sharp selloff that began earlier in the year. The MSCI All Country World Index (ACWI), which captures companies around the globe, fell 15.7% during the quarter and 20.2% year to date. In the U.S., the S&P 500 Index declined 16.1% during the quarter and 20% year to date. To put the year-to-date chart into context for the S&P 500 Index, it was the worst start to a year since 1970 and the second worst six-month period after July-December 2008 of the Global Financial Crisis.

Developed and emerging market international stocks also declined during the quarter but did so by less than the S&P 500 Index (respectively, -14.5% for MSCI EAFE and -11.4% for MSCI EM). The U.S. dollar strengthened against most major currencies, providing a headwind to non-U.S. revenues.

Inflation remained stubbornly high during the quarter, with the U.S. Consumer Price Index (CPI) continuing to expand through May at an annualized rate of 8.6%. Much of this change reflects a backward-looking increase in food and energy prices, though prices in “sticky” inflation1 categories including housing and services have also been increasing. These changes were exacerbated by Russia’s initial invasion of Ukraine in February but began to moderate through the second quarter. Wheat, for example, declined 14%, while the price of natural gas also eased after temporarily increasing tenfold in the month of February.

Nonetheless, spiraling inflation caused the Federal Reserve to hasten the planned path of interest rate hikes — a 75 bp increase in the Federal Funds rate in June marked the largest since 1994. The faster pace of hikes — and the fear that the Fed may not be able to engineer a soft landing — was pointed to as a primary cause for the selloff.

Over the past decade, favorable economic conditions and an environment of low rates fueled the expansion of “growth” and technology-related companies. Now, the market has violently moved away from these. Importantly, the decline has largely corresponded with collapsing multiples, not falling earnings estimates, which remain robust for many businesses — whether justified or not.

Change in price, price-to-earnings and forecasted earnings of the S&P 500 Index

This line graph plots the change in price, price-to-earnings and forecasted earnings for the S&P 500 Index from July 2019 through July 2022. During the time frame, the index price increased from 2,990.41 to 3,825.45; the P/E ratio decreased from 17.02 to 16 and EPS increased from 176.21 to 239.93. The trendline for earnings is now shown above the P/E and Index Price lines.

Source: FactSet as of 7/6/22

The price-to-earnings ratio is used to measure a company’s current share price in relation to its earnings per share.


This is a critical distinction to make. Multiples contracting has been a healthy development for this market, and we believe a new set of market leaders will emerge as valuations come to depend more heavily on fundamentals.

The information technology and consumer discretionary sectors — with high valuations at the start of the year — were the hardest hit during the second quarter2. Materials companies also lost ground as recessionary fears brought commodity prices down. Conversely, energy declined the least (-5.2%2) as oil and gas supply remained tight amid the ongoing Russia-Ukraine conflict.

Dividend payers have continued their march back into the limelight. Globally, the highest-yielding dividend quartile declined a full 14 percentage points less than that of the lowest one.2 Those highest-yielding companies were well-represented by a variety of sectors and industries — pharma and health care giants like Merck, Pfizer, and Gilead, telecommunications companies, large energy producers Exxon and Total, and defense companies such as BAE Systems.

Among the top detractors in the MSCI ACWI Index from the lowest-paying quartile were some of the tech, communication services and consumer darlings: Amazon, Tesla, Alphabet, Meta Platforms, Netflix, PayPal, Block, Adobe, and Shopify.

Rhyming with the above, companies classified as “growth” by style trailed “value” companies meaningfully by more than 15 percentage points.3 As shown below, the year-to-date picture now shows a six-month return delta between growth and value around the globe not seen since 2001 for the Russell 1000, or at any point since the inception of the MSCI ACWI (01/01/1988).3

Rolling six-month excess returns (% pts): value vs. growth

There are two lines both showing a value style-related index return time series minus the corresponding growth style-related return time series.  Both are 6-month rolling lines. The Russell 1000 line (indicative of the U.S. market) is showing the difference between the Russell 1000 Value and the Russell 1000 Growth. The chart spans from July 1997 to June 2022.

Source: FactSet as of 6/30/22. The MSCI ACWI line (indicative of the global market) shows the difference between the ACWI Value and the ACWI Growth indexes.
 

1The Atlanta Fed’s sticky-price consumer price index (CPI) is a weighted basket of items that change price relatively slowly. As of the latest update on 6/10/22, the sticky-price index increased 5.2% over the last twelve months through May 2022.
 

2MSCI ACWI As of June 30, 2022
 

3As defined by the difference between the Russell 1000 Value and Russell 1000 Growth Indexes and the ACWI Value and ACWI Growth Indexes.

Consumer Price Index is an index of the variation in prices paid by typical consumers for retail goods and other items.


American Funds and ETF update

Q2 2022 (all mutual fund results referenced reflect F-2 share class; ETF results NAV)

Absolute returns: Amidst the market selloff, all twenty of our equity and multi-asset American Funds declined during the quarter. Our equity income strategies such as Capital Income Builder® (-8.0%) and The Income Fund of America® (-8.1%), as well as our growth and income strategies (including American Mutual Fund® at -8.3%, Washington Mutual Investors FundSM at -11.2%, and International Growth and Income FundSM at -11.3%) declined the least in absolute terms. Conversely, our growth strategies — those which primarily seek long-term appreciation of capital — saw the most significant declines (including Capital Group Growth ETFSM at -23.5%, Growth Fund of America® at -21.9%, AMCAP Fund® at -19.5%, The New Economy Fund® at -19.5%).

Against primary prospectus benchmarks, our funds held up relatively well, with most American Funds (13 of 20) declining less.

Regardless of primary geography, our equity income, balanced, and growth and income American Funds held up the best in the market turmoil.

  • Both of our equity income strategies (Capital Income Builder and The Income Fund of America) outpaced their blended benchmarks handily, by more than 400 bps in each case.

  • Both of our balanced strategies (American Balanced Fund® and American Funds Global Balanced FundSM) outpaced their blended benchmarks.

  • All four of our U.S.-oriented growth and income American Funds declined less than their primary benchmarks.

    • American Mutual Fund and Washington Mutual Investors Fund outpaced handily, declining by 776 bps and 489 bps less than the S&P 500 Index, respectively. American Mutual Fund’s positioning away from the more growth-oriented sectors like tech and consumer discretionary was additive, but the strategy’s high-quality, dividend-oriented approach led to individual holdings outpacing those of the index in nine of eleven Global Industry Classification Standard sectors.

    • A similar pattern was true for Washington Mutual Investors Fund. Health care companies and defense contractors were among the top relative contributors of companies held by the fund.

    • Our most conservative equity ETF, Capital Group Dividend Value ETFSM, outpaced the S&P 500 index by 276 bps, driven by the fund’s bias toward dividend-oriented companies that have exhibited notable resilience.

    • The Investment Company of America®, which seeks a balance of income and growth, modestly outpaced the S&P 500 index, as did Fundamental Investors® and Capital Group Core Equity ETFSM.
       
  • Two of our three international and global growth and income American Funds outpaced benchmarks (International Growth and Income Fund by 244 bps and Capital World Growth and Income Fund® by 93 bps). American Funds Developing World Growth and Income FundSM, by contrast, declined slightly more than the MSCI EM benchmark, since some of the internet and consumer discretionary companies in China — not held in size by the fund — declined less than the market.
     

By contrast, our growth strategies largely trailed their primary benchmarks.

In the U.S., this included both The Growth Fund of America and AMCAP Fund, which trailed by 584 bps and 344 bps, respectively, as well as Capital Group Growth ETF, which trailed by a meaningful 745 bps. Growth Fund of America, AMCAP Fund, and Capital Group Growth ETF were positioned with a greater focus on companies with long-term growth potential, leading to larger positions relative to the S&P 500 Index in the consumer discretionary and communication services sectors, and parts of the technology sectors, and smaller positions in energy, consumer staples, and utilities.

  • In the case of Growth Fund of America, the fund’s largest holding, Tesla, was also the largest detractor. Across industries, a number of technology platforms and cloud-based services detracted as valuations contracted sharply. This included Airbnb, Amazon, Shopify, Cloudflare, and MongoDB.

  • AMCAP Fund was impacted primarily by weakness in the fund’s largest relative position, Netflix, as well as larger positions in digital payments companies including Affirm Holdings and Block.

  • AMCAP Fund’s results held up better than Growth Fund of America in the quarter due to its smaller position in consumer discretionary companies, larger weight to health care, and smaller positions in cloud-oriented technology companies. The fund also held up better than the Russell 1000 Growth index, sometimes used to measure results of U.S. Large Growth funds.

  • EuroPacific Growth Fund® declined slightly more than the MSCI ACWI ex USA during the quarter due in part to holding certain consumer discretionary companies, technology companies, digital platform providers, industrials, and mining companies. The strategy’s larger weight to Brazil and smaller weight to China also detracted, while positive stock selection in India helped offset some of the loss. Capital Group International Focus Equity ETFSM, by contrast, outpaced the index modestly, due in part to its Chinese health care holdings which fared better than the market.

  • New World Fund® declined slightly less than the MSCI ACWI, though it trailed the MSCI EM Index as emerging market companies outpaced developed international ones. The strategy takes a multidimensional approach to investing in emerging economies — holding companies based on both developed and emerging markets — which helps explain its result in between these two indices.

  • New Perspective Fund®, a global strategy, declined more than the MSCI ACWI during the quarter, due in part to holding certain consumer discretionary and communications service companies such as Tesla and Netflix. Capital Group Global Growth Equity ETFSM also trailed the index, due in part to its large semiconductor holdings.

  • The New Economy Fund declined more than the MSCI ACWI due to a greater weight in U.S. internet-oriented companies, as well as weakness in certain holdings in the technology and consumer discretionary sectors.

  • SMALLCAP World Fund® trailed its primary index — the MSCI ACWI Smallcap — during the quarter. Due to the idiosyncratic nature of small and mid-sized companies owned by the fund, this was largely driven by specific companies held. One such example is an American database software provider whose stock slid partly due to macro fears, despite a strong earnings report that includes a positive surprise on revenue growth of 57% year-over-year.

  • Two of our funds — American Funds Global Insight FundSM and American Funds International Vantage FundSM — aim by prospectus to provide “prudent growth of capital and conservation of principal.” Both funds declined less than their respective benchmarks during the quarter (by 279 bps and 177 bps, respectively). While not considered “growth and income” strategies, we would expect these funds to deliver a smoother return profile over a full market cycle by holding up better in downturns like we’re currently experiencing.
     

Longer-term results update and outlook

Most of the American Funds equity strategies have decades of history, which allow us to draw numerous observations about past results. When one looks at all rolling monthly 10-year observations, The Capital SystemSM has resulted in all of the equity American Funds with relevant history having outpaced their primary index4 a majority of the time since inception dates. Our most conservative U.S.-oriented fund, American Mutual Fund, still did so (63%) of the time, which is to say that its benchmark — the S&P 500 Index — only succeeded against it 37% of the time.
 

Percentage of time funds outpaced index over all 10-year rolling periods (Class F-2 shares of 6/30/22)

This bar graph depicts monthly rolling 10-year success rates for equity-focused American Funds mutual funds relative to each fund’s respective benchmark. The success rates range from 54% for SMALLCAP World Fund to 100% for International Growth and Income Fund.

Source: FactSet


Market volatility has returned, but that’s no reason to be discouraged. Amidst this backdrop, we remain optimistic about investing over the long-term, due in part to post-pandemic growth, a return to corporate earnings and fundamentals — rather than multiple expansion — and what we believe to be a coming healthy recession that will help clean out excesses of the last decade.

In our view, what we’re experiencing is climate change, not a passing storm. It will be important to avoid anchoring on past growth rates, margins, or stock prices, and the following are just a few of the difficult questions that our investors are wrestling with today.

  • How are companies “reglobalizing” their supply chains — balancing security and redundancy with efficiency and costs — and what opportunities may arise from this shift?
  • How quickly can China continue to move beyond lockdowns and normalization?
  • Where does the largest selloff of software stocks leave the future long-term winners?
  • With the world in short supply of oil, has a decade-long cycle turned a corner?
  • Where might we be seeing “shortages” that aren’t in fact real, but rather overordering and/or pull-forward demand?
  • What company-specific implications exist from the diminishing supply of Russian gas?
     

If the market indeed comes to ascribe more value to fundamentals, we believe a patient, bottom-up investment approach can help identify those with strong earnings growth in a wide variety of scenarios.

As long-term stewards of capital for millions of households’ life savings, we take the responsibility of choosing which companies to invest in very seriously.  We remain confident that we have the right people in place, making decisions based on deep, company-specific research and with healthy debate — this is, and has always been, the basis of our investment philosophy.  

 

4Index comparisons

The 13 American Funds equity-focused funds used in our analysis (and the relevant indexes with which they were compared) are as follows: AMCAP Fund, American Mutual Fund, Fundamental Investors, The Growth Fund of America, The Investment Company of America and Washington Mutual Investors Fund (S&P 500 Index); Capital World Growth and Income Fund (Capital World Growth and Income Fund Historical Benchmarks Index); New World Fund (MSCI All Country World Index); New Perspective Fund (New Perspective Fund Historical Benchmarks Index); EuroPacificGrowth Fund (EuroPacific Growth Fund Historical Benchmarks Index); International Growth and Income Fund (International Growth and Income Fund Historical Benchmarks Index); SMALLCAP World Fund (SMALLCAP World Fund Historical Benchmarks Index). MSCI All Country World Index lacks sufficient history to have covered the lifetime of The New Economy Fund; therefore, the MSCI World Index was used for the period 12/1/83 (the fund’s inception) through 12/31/87. The MSCI All Country World Index was subsequently used.

This analysis includes all the equity American Funds with 36 or more available rolling monthly 10-year return observations, which we deem to be sufficient to draw relevant statistical observations from.

Fund results and analysis 

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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, which can be obtained from a financial professional and should be read carefully before investing.

Figures shown are past results for Class F-2 shares and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. View fund expense ratios and returns.

ETF 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. Prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Market price returns are determined using the official closing price of the fund's shares and do not represent the returns you would receive if you traded shares at other times. View ETF expense ratios and returns.

American Funds Global Insight Fund and American Funds International Vantage Fund began investment operations on April 1, 2011, but were only available to a limited number of investors. Now available on the American Funds platform, the reorganized fund has adopted the results and financial history of the original fund.

Results for certain funds with an inception date after the share class inception also include hypothetical returns because those funds' shares sold after the funds' date of first offering. View dates of first sale and specific expense adjustment information. [https://www.capitalgroup.com/advisor/investments/first-sale-date.htm] Certain share classes were offered after the inception dates of some funds. Results for these shares prior to the dates of first sale are hypothetical based on the original share class results without a sales charge, adjusted for typical estimated annual expenses. Class F-2 shares were first offered on November 8, 2019.

Capital Group exchange-traded funds (ETFs) are actively managed and do not seek to replicate a specific index. ETFs are bought and sold through an exchange at the then current market price, not net asset value (NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV when traded on an exchange. Brokerage commissions will reduce returns. There can be no guarantee that an active market for ETFs will develop or be maintained, or that the ETF's listing will continue or remain unchanged.

As nondiversified funds, Capital Group ETFs have the ability to invest a larger percentage of assets in securities of individual issuers than a diversified fund. As a result, a single issuer could adversely affect a fund’s results more than if the fund invested a smaller percentage of assets in securities of that issuer. See the applicable prospectus for details.

Market price returns are determined using the official closing price of the fund's shares and do not represent the returns you would receive if you traded shares at other times.

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. Small-company stocks entail additional risks, and they can fluctuate in price more than larger company stocks.

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds.

The indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. There have been periods when the funds have lagged the index. Past results are not predictive of results in future periods.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

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 should not be considered advice, an endorsement or a recommendation.

MSCI All Country World Index (ACWI) is a free float-adjusted market capitalization weighted index that is designed to measure equity market results in the global developed and emerging markets, consisting of more than 40 developed and emerging market country indexes.

MSCI All Country World Small Cap Index is a free float-adjusted market capitalization-weighted index that is designed to measure equity market results of smaller capitalization companies in both developed and emerging markets. Results reflect dividends net of withholding taxes. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization weighted index that is designed to measure developed equity market results, excluding the United States and Canada. Results reflect dividends net of withholding taxes. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

MSCI Emerging Markets Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market results in the global emerging markets, consisting of more than 20 emerging market country indexes. Results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

MSCI All Country World Index ex USA is a free float-adjusted market capitalization weighted index that is designed to measure equity market results in the global developed and emerging markets, excluding the United States. The index consists of more than 40 developed and emerging market country indexes. Results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market results of developed markets. The index consists of more than 20 developed market country indexes, including the United States. Results reflect dividends net of withholding taxes. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. You may not redistribute the MSCI data or use it as a basis for other indices or investment products.

Russell 1000 Growth Index is a market capitalization-weighted index that represents the large-cap growth segment of the U.S. equity market and includes stocks from the Russell 1000 Index that have higher price-to-book ratios and higher expected growth values. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

Russell 1000 Value Index is a market capitalization-weighted index that represents the large-cap value segment of the U.S. equity market and includes stocks from the Russell 1000 Index that have lower price-to-book ratios and lower expected growth values. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

S&P 500 Index is a market capitalization-weighted index based on the average weighted results of approximately 500 widely held common stocks.

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