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? For defined contribution (DC) plans that use a combination of growth and value/income strategies as part of their core U.S. equity allocation, it’s important that both levers of the allocation work well together for portfolios to generate the desired risk-return profile. 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 strong 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 September 30, 2017
Sources: Capital Group, Morningstar. Results based on Class R-6 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 within a DC plan, 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 portfolio of 80% stocks (55% U.S. and 25% international) and 20% 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.
Results for 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. Past results are not predictive of results in future periods. Investors cannot invest directly in an index. 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. 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.
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. 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. However, the longer the time period, the greater success GFA has had against the Russell 1000 Growth Index.
Sources: Capital Group, Morningstar.
Based on monthly returns for the period December 31, 1978 (the inception of the Russell 1000 Growth Index), through September 30, 2017. Based on Class R-6 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
Source: Morningstar. Based on monthly returns for the period December 31, 1978 (the inception of the Russell 1000 Growth Index), through September 30, 2017. Based on Class R-6 shares.
Results for Class R-6 Shares (as of September 30, 2017)
Sources: Capital Group and Morningstar. When applicable, investment results reflect fee waivers and/or expense reimbursements, without which results would have been lower.
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.
Returns shown at net asset value (NAV) have all distributions reinvested.
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.
Because Class R-6 shares do not include any recordkeeping payments, expenses are lower and results are higher. Other share classes that include recordkeeping costs have higher expenses and lower results than Class R-6.
Investment results assume all distributions are reinvested and reflect applicable fees and expenses.
Expense ratios are as of the most recent prospectus.
Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by Capital Group, which receives fees for managing, distributing and/or servicing its investments.
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.
Capture ratios reflect the annualized product of fund vs. index returns for all months in which the index had a positive return (upside capture) or negative return (downside capture).
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.