October’s Mutual Fund Red Flags

Each month Morningstar puts out a report on changes going on with certain mutual funds that may be cause for concern. This month caught my attention because it flags a few American Funds, which I know are quite popular with mutual fund investors. One thing I found interesting was:

We’re flagging three funds from American because their portfolios have undergone significant structural changes during the past five years. Managers of growing stock funds face higher trading (or “market-impact”) costs because their transactions compose more of each stock’s volume.

I have had many people ask me why funds tend to close or alter their structure when they get very large, and this article talks about some specific issues in regards to three American Funds. One fund in particular I have seen in many portfolios, and even hold some myself, the Growth Fund of America (AGTHX). This fund is bursting at over $147 billion in assets. This isn’t always a bad thing, but keep in mind that funds undergo changes which may alter its role in your portfolio.