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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

Visit americanfunds.com/retire

IF YOUR PLAN ID BEGINS WITH 34 OR 135

Visit myretirement.americanfunds.com

Portfolio Concepts

PC trends: Stay ahead of the curve

Our experienced team found three trends to watch for in client portfolios

The Capital Group Portfolio and Analytics team reviewed 3,304 portfolios in the first half of 2020.* In their analysis, they uncovered a variety of noteworthy and persistent portfolio construction trends. Understanding these patterns of investment behavior may provide insight into building effective, efficient portfolios that align with your clients’ real-world financial goals.

Some of our critical findings include:

Average advisor portfolio is 15% overweight U.S. equities relative to global market cap weighted index

Average allocation to U.S. equities

Average advisor portfolio has cut about a quarter of their allocation to value stocks

Average allocation to large-cap value stocks

Average fixed income allocation to spread categories has increased by about 66% in two years

The average fixed income allocation to spread categories

*The Capital Group Portfolio Consulting and Analytics team reviewed 3,304 portfolios over the first six months of 2020. The team aggregated the holdings and allocations data across all the portfolios mentioned above. This data was then used to determine a variety of characteristics, such as average fund category weightings, asset class weights and relative weights versus benchmarks. Spread categories include any fixed income category that maintains additional yield greater than a U.S. Treasury of comparable maturity.

GLOBAL FLEXIBILITY

Global flexibility remains key in building a diversified portfolio

Our team found that the typical portfolio reviewed had almost three times the amount of U.S. equity exposure compared to non-U.S., with an approximately 74% allocation to U.S. equity versus 26% to non-U.S. The average advisor portfolio is 15% overweight U.S. equities relative to the MSCI All Country World Index. By consistently favoring U.S. equities, advisors may lose out on the potential long-term opportunities with non-U.S. equities.

U.S. versus non-U.S. equity relative exposure

The average financial  advisor geographic  weighting has been  74% U.S. equity and  26% non-U.S. equity.  The average MSCI  ACWI geographic  weighting has been  58% U.S. equity and  42% non-U.S. equity.

Source: Morningstar and Capital Group Portfolio Consulting and Analytics data as of 6/30/20.

As noted in the chart below, Standard & Poor's 500 Index (S&P 500) has outpaced international equities — proxied by MSCI World Index ex USA — for the past 10 years. However, MSCI World Index ex USA equities outpaced the S&P 500 for the 10 years prior from 2000 to 2009. In fact, since 1970, U.S. equities have lagged international equities about as often as they have led.

As history has shown, expressing large geographic bias in equity allocations can have long-term implications. Over a 10-year period, such a bias may cost a portfolio thousands of basis points in “missed” returns relative to a more balanced global equity allocation.

10-year annualized returns by index

This chart shows the  S&P 500 Index returns,  the MSCI World ex USA  NR USD returns and the  MSCI World NR USD  returns. From January 1,  2010 to December 31,  2019, the S&P 500  returned 13.56%, while  the MSCI World ex USA  NR USD returned 5.32%,  and the MSCI NR USD  returned 9.47%. From  January 1, 2000 to  December 31, 2019, the  S&P 500 Index returned  -0.95%, the MSCI World  ex USA NR USD returned  1.62% and the MSCI  World NR USD returned  -0.24%. From January 1,  1990 to December 31,  1999, the S&P 500  returned 18.21%, the  MSCI World ex USA NR  USD index returned  7.10% and the MSCI  World NR USD returned  11.42%. From January 1,  1980 to December 31,  1989, the S&P 500  returned 17.51%, the  MSCI World ex USA NR  USD returned 20.68%,  and the MSCI World NR  USD returned 18.76%.  From January 1, 1970 to  December 31, 1979, the  S&P 500 returned 5.85%,  the MSCI World ex USA  NR USD returned 9.62%  and the MSCI World NR  USD returned 5.69%.

Source: Return data by Morningstar. Indexes selected because they are representative of commonly used benchmarks for U.S. (S&P 500) , Global (MSCI World) and non-U.S. (MSCI World ex USA) equity markets.

Fund implementation

ANWFX (F-2)

New Perspective Fund®

The fund takes a flexible approach to global growth. It seeks to take advantage of evolving global trade patterns by predominantly investing in companies that have potential for growth in capital. It invests primarily in multinational companies with a meaningful share of their sales and operations outside of their home countries. This approach provides the strategy’s portfolio managers with geographic flexibility and the ability to navigate different markets.

SMCFX (F-2)

SMALLCAP World Fund®

A pioneer in global small-cap investing, this strategy seeks growth of capital by investing in some of the fastest growing and most innovative companies in the world. It invests in companies with market capitalizations of up to $6 billion at the time of purchase. As one of our most research-intensive strategies, with a team of more than 100 portfolio managers and research analysts based in both developed and developing markets, it takes full advantage of our global presence and insights.


SECTORS AND STYLE

Advisors have been reducing allocations to value funds

According to our team’s analysis, advisors have been markedly reducing allocations to large-cap value equities over the past three years. By mid-2020, average allocations to large growth and blend categories were 35% and 41%, respectively, compared to value, which was 25%. This represents a reduction in relative allocation to large-cap value by a quarter from three years ago.

Average allocation style box

This chart shows the breakdown of value,  blend and growth categories. In the second quarter of 2020,  the value category was 25%, while the blend category was 41% and the growth category was 35%. In the second quarter of 2017, the  value category was 33%,  the blend category was 34% and the growth category was 33%.

Source: Morningstar. Capital Group Portfolio Consulting and Analytics team. Values may not add up to 100% due to rounding.

This trend produced short-term gains in the current market, but may have long-term implications for client portfolios. To illustrate that point, growth stocks outpaced value in more than 50% of rolling one-, three- and five-year periods. However, over all three-, five-and 10-year rolling periods, the total return of value stocks exceeded that of growth by 24, 57, and 71 basis points annually, respectively.

Historical rolling monthly success

This chart shows the  periods when value  stocks and growth  stocks outperformed.  This chart illustrates that  the growth category has  outpaced value in over  50% of rolling one-,  three- and five-year  periods. However, over  all three-, five- and  10-year rolling periods,  the total return of the  value category  exceeded that of the  growth category by 24,  57, and 71 basis points  annually, respectively.

Source: Morningstar, based on Russell 1000 Growth Index and Russell 1000 Value Index, from 12/29/78–9/30/20. Analysis for rolling periods based on monthly observations.

Fund implementation

AMRFX (F-2)

American Mutual Fund®

Conservatively managed to reduce volatility and risk, this strategy has provided downside resilience during every S&P 500 decline of 15% or more since its inception in 1950.* It invests primarily in well-established companies with strong balance sheets and a history of consistent dividends. The portfolio does not invest in companies that derive the majority of their revenues from tobacco and/or alcohol.

*The fund has provided excess returns versus the S&P 500 TR Index during all 14 major market declines (15% or more) over its lifetime, dating back to 1950, as of April 30, 2020 (for all share classes at NAV).

WMFFX (F-2)

Washington Mutual Investors FundSM

A disciplined approach to investing that uses strict eligibility criteria to screen for companies across a broad array of industries with strong balance sheets and consistent dividends. This approach has enabled the strategy to outpace its index during almost every S&P 500 decline of 15% or more since its inception in 1952.† The strategy seeks to be fully invested and avoids companies that primarily derive revenue from alcohol or tobacco products.

†The fund has provided excess returns versus the S&P 500 TR Index during 13 of 14 major market declines (15% or more) over its lifetime, dating back to 1950, as of April 30, 2020 (for all share classes at NAV).


FIXED INCOME OUTCOMES

The importance of aligning bond investments with a portfolio’s investment objectives

Over the past two years, advisors have dramatically increased allocation to riskier fixed income categories, even as spreads compressed and yields marched lower.

Average allocation to spread categories, 2018–2020

There has been an  increase in average  allocation to spread  categories over 2018 to  2020. In the second  quarter of 2018,  allocation was 11.70%,  while in the first quarter  of 2019, the allocation  was 12.66%. By the first  quarter of 2020, the  allocation was 18.26%  and by the second  quarter of 2020, the  allocation to spread  categories rose to  19.49%.

This chart is based on data provided to the Capital Group Portfolio and Analytics team for analysis. The spread categories include any fixed income category that maintains additional yield greater than a U.S. Treasury of comparable maturity.

In times of equity market volatility, high yielding and lower quality fixed income tend to be highly correlated with equities, and may suffer from illiquidity. As highlighted in the chart below, returns to higher yielding, riskier “spread categories” like high-yield bonds, have lagged categories like intermediate core bond, which tend to be composed of higher quality bond investments.

12-month yield versus YTD return

This chart is based on  data provided to the  Portfolio Consulting and  Analysis team at Capital  Group. The chart shows  12-month yield versus  year-to-date return for  Morningstar categories:  High Yield Bond, Bank  Loan, Multisector Bond,  Emerging Markets Bond,  Corporate Bond,  Nontraditional Bond,  Intermediate Core-Plus  Bond and Intermediate  Core Bond. As  highlighted in this chart,  returns to higher  yielding, riskier ‘spread  categories’ have lagged  higher quality bond  investments, year to  date, due to the  market's volatility.

A spread sector or spread category denotes any fixed income category that maintains additional yield greater than a U.S. Treasury of comparable maturity.

Morningstar categories included: High Yield Bond, Bank Loan, Multisector Bond, Emerging Markets Bond, Corporate Bond, Nontraditional Bond, Intermediate Core-Plus Bond, Intermediate Core Bond.

Fund implementation

ABNFX (F-2)

The Bond Fund of America®

Taking a broadly diversified, high-quality approach, this core bond strategy has the ability to invest in every sector of the bond market, with a limited percentage of below-investment-grade holdings. This approach historically has helped to diversify equity risk in a portfolio.* The strategy draws on our experience in managing U.S. core bonds since 1973 and an 85-year heritage of investing in U.S. markets.

*Source: Capital Group, based on the fund’s 3-year correlation to the S&P 500 TR Index on a rolling monthly basis for the period from January 1, 2009, and ending December 31, 2019 (for all share classes at NAV).

ANBFX (F-2)

American Funds Strategic Bond FundSM

A core plus fund focused on total return consistent with preservation of capital. This strategy seeks higher returns than core bond funds with generally low equity correlation. It aims to drive returns primarily through interest rate, yield curve and inflation positioning, generally resulting in liquid investments with high credit quality. It has the flexibility to invest in extended bond sectors on an opportunistic basis, allowing it to shift credit and duration exposure and pursue opportunities.

What this means

The key is to work with your clients to understand their goals and time horizons and not be overly reactive to market volatility or headlines. Our objective-based, flexible approach may be well suited to helping you create portfolios to address your clients’ real-world needs.

Click here for more possible courses of action

Meet our team

The Capital Group Portfolio Consulting and Analytics team provides customized analysis and reporting to help improve portfolio outcomes. Our portfolio construction approach focuses on objective-driven design, flexible execution and targeted solutions to help your clients reach their individual goals.

In addition, we offer:

An examination of the roles investments play in aligning investment objectives to a portfolio's risk-adjusted returns

Insight into stewardship, portfolio construction principles and investment metrics, based on proprietary Capital Group research

An ongoing resource with a mission to help financial advisors improve client investment outcomes

Test your portfolio’s resilience

Get a personalized portfolio consultation.

Portfolio Construction Concepts

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.

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 portfolios and for portfolios with significant underlying bond holdings is not guaranteed. Investments 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 use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional cash securities, such as stocks and bonds.

Bond ratings, which typically range from AAA/Aaa (highest) to D (lowest), are assigned by credit rating agencies such as Standard & Poor's, Moody's and/or Fitch, as an indication of an issuer's creditworthiness.

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. Source: London Stock Exchange Group plc and its group undertakings (collectively, the "LSE Group"). © LSE Group 2020. FTSE Russell is a trading name of certain of the LSE Group companies. FTSE® and Russell® are trademarks of the relevant LSE Group companies and are used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company's express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

Standard & Poor’s 500 Composite Index (“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 © 2020 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 is prohibited without written permission of S&P Dow Jones Indices LLC.

©2020 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 any use of this information. Past performance is no guarantee of future results.

MSCI All Country World Index is a free float-adjusted market capitalization-weighted index that is designed to measure equity market results in the global developed and emerging markets. The index consists of more than 40 developed and emerging market country indexes. This index is unmanaged, and its results include reinvested dividend and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or taxes.

MSCI World Index measures stock market results in more than 20 developed markets. MSCI World Index results reflect net dividends.

MSCI World Index ex USA is a free float-adjusted market capitalization index that is designed to measure results of more than 20 developed equity markets, excluding the United States. Results reflect net dividends.

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.

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.

Standard & Poor’s 500 Composite Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks. This index is unmanaged, and its results include reinvested dividend and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or taxes.

Large-value portfolios invest primarily in big U.S. companies that are less expensive or growing more slowly than other large-cap stocks. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap. 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).

Large-blend portfolios are fairly representative of the overall U.S. stock market in size, growth rates and price. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap. The blend style is assigned to portfolios where neither growth nor value characteristics predominate. These portfolios tend to invest across the spectrum of U.S. industries, and owing to their broad exposure, the portfolios' returns are often similar to those of the S&P 500 Index.

Large-growth portfolios invest primarily in big U.S. companies that are projected to grow faster than other large-cap stocks. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap. 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). Most of these portfolios focus on companies in rapidly expanding industries.

Intermediate-term core bond portfolios invest primarily in investment-grade U.S. fixed income issues including government, corporate and securitized debt, and hold less than 5% in below-investment-grade exposures. Their durations (a measure of interest-rate sensitivity) typically range between 75% and 125% of the three-year average of the effective duration of the Morningstar Core Bond Index.

Intermediate-term core-plus bond portfolios invest primarily in investment-grade U.S. fixed income issues including government, corporate and securitized debt, but generally have greater flexibility than core offerings to hold non-core sectors such as corporate high yield, bank loan, emerging markets debt and non-U.S. currency exposures. Their durations (a measure of interest-rate sensitivity) typically range between 75% and 125% of the three-year average of the effective duration of the Morningstar Core Bond Index.

Bank-loan portfolios primarily invest in floating-rate bank loans and floating-rate below-investment-grade securities instead of bonds. In exchange for their credit risk, these loans offer high interest payments that typically float above a common short-term benchmark such as the London Interbank Offered Rate, or LIBOR.

Corporate bond portfolios concentrate on investment-grade bonds issued by corporations in U.S. dollars, which tend to have more credit risk than government or agency-backed bonds. These portfolios hold more than 65% of their assets in corporate debt, less than 40% of their assets in non-U.S. debt, less than 35% in below-investment-grade debt and durations that typically range between 75% and 150% of the three-year average of the effective duration of the Morningstar Core Bond Index.

High-yield bond portfolios concentrate on lower quality bonds, which are riskier than those of higher quality companies. These portfolios generally offer higher yields than other types of portfolios, but they are also more vulnerable to economic and credit risk. These portfolios primarily invest in U.S. high-income debt securities where at least 65% or more of bond assets are not rated or are rated by a major agency such as Standard & Poor's or Moody's at the level of BB (considered speculative for taxable bonds) and below.

Multisector-bond portfolios seek income by diversifying their assets among several fixed income sectors, usually U.S. government obligations, U.S. corporate bonds, foreign bonds and high-yield U.S. debt securities. These portfolios typically hold 35% to 65% of bond assets in securities that are not rated or are rated by a major agency such as Standard & Poor's or Moody's at the level of BB (considered speculative for taxable bonds) and below.

Emerging markets bond portfolios invest more than 65% of their assets in foreign bonds from developing countries. The largest portion of the emerging markets bond market comes from Latin America, followed by Eastern Europe. Africa, the Middle East and Asia make up the rest.

Inclusion in nontraditional bond is informed by a balance of factors determined by Morningstar analysts. Those typically include a mix of: absolute return mandates; goals of producing returns not correlated with the overall bond market; performance benchmarks based on ultrashort-term interest rates such as Fed funds, T-bills or LIBOR; the ability to use a broad range of derivatives to take long and short market and security-level positions; and few or very limited portfolio constraints on exposure to credit, sectors, currency or interest-rate sensitivity. Funds in this group typically have the flexibility to manage duration exposure over a wide range of years and to take it to zero or a negative value.


Past results are no guarantee of results in future periods. Market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.

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.

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