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Summary The New Perspective Fund is the largest global growth oriented mutual fund in the world. The managers’ long-term approach has consistently resulted in outperformance within its category. Despite the fund’s strengths, investors should avoid it in an environment of a rising U.S. dollar. I select funds on behalf of my investment advisory clients in many different defined contribution plans, namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Fund Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most out of this article it is helpful to understand my approach to investing in 401(k)s . New Perspective Fund The New Perspective Fund has the following share classes: If the fund is an option in your 401(k), it will most likely come in the form of the A shares or one of the R share classes. The expense ratio for the A shares is .76%. The expense ratios for the R shares vary widely, from as low as .45% to as high as 1.55%. For the purposes of this article I will assume the A shares are the available option and evaluate the fund based on the .76% expense ratio. The fund invests primarily in blue chip , multinational companies from anywhere in the developed world. Its stated focus is that of companies with strong growth prospects related to changes in global trade and economic relationships. It may also hold convertibles, preferred stocks, and bonds. At present, about half the fund’s holdings are U.S. companies. The fund has about $61 billion in total assets and is the largest global growth mutual fund available. Given its size, it tends to (indeed has to) focus on large capitalization stocks. As of June 30, 2015, the weighted average market capitalization (“cap”) of its 316 equity holdings was $52 billion. Simply put, the fund is a large (or more specifically, “mega”) cap global growth fund. Consistent Long Term Performance American Funds compares the New Perspective Fund’s performance to the MSCI World Index, which is a market capitalization weighted index that combines the stock markets of all the developed nations in the world (20+ countries). As far as I can tell, American Funds uses this index, because it is really the only one available that is comparable. As of June 30, 2015, the fund has outperformed this index in the past 1-year (+4.6%), 3-year (+2.2%), 5-year (+2.0%), and 10-year (+2.5%) periods. Using the Barron’s fund screener and looking at the universe of global, large cap growth funds with at least $3 billion in assets, I found the fund to be the top performer over the last one, five, and ten year periods. The fund’s managers (there are eight of them) take a long term approach to investing. This is reflected by the fact that the fund’s portfolio turnover was only 25% in 2014. The fund clearly adds value for investors wanting to invest in the growth dynamic of the entire developed world. An Important Consideration I think the most important consideration for 401(k) investors who have this fund as an option is whether or not they want to be invested in large cap growth companies of the international developed world. Currency fluctuations are an important consideration. The following chart shows the performance of the U.S. dollar index going back to the early 90’s: ^DXY data by YCharts In 2014, the U.S. dollar began a sharp move higher, which looks similar to the move back in 1997. In line with my forecast , I expect the present move higher of the U.S. dollar to be temporarily stalled by a spike in oil prices, before resuming a multi-year move higher. In this timeframe I also expect the Japanese Yen to outright crash and the Euro to also suffer. Given this, I prefer to stay exclusively in domestic U.S. stocks. The following chart shows how the total return of the New Perspective fund lagged the S&P 500 total return from January 2014 through February 2015 when the U.S. dollar was rising sharply: ANWPX Total Return Price data by YCharts I don’t know how the New Perspective Fund was invested during the second half of the 1990’s, but the following chart reveals how its total return severely lagged the total return of the S&P 500 during this period. Recall from the first chart above that this was the period of time when the U.S. dollar was rising significantly. My guess is that this underperformance was due to the fund’s foreign holdings at the time. ANWPX Total Return Price data by YCharts I suppose an argument could be made that the fund will not lag in such an environment because most of its holdings are multinationals, however, I expect global capital, fleeing falling domestic currencies, to migrate to U.S. stocks. Low Dividend Yield Could Hurt The U.S. is due for a recession in the next few years. I think we are still at least a year away, but soon enough, one will be here. In an environment of slower growth and low interest rates, I would prefer to hold stock funds with higher dividend yields. As of July 31, 2015, the New Perspective Fund’s dividend yield over the previous 12 months was a weak .56%. That doesn’t cut it for me, especially considering the fact that a good portion of historical equity returns have come from dividends. Investors who want growth do not have to sacrifice good dividend yields . Moreover, 401(k) plans are tax deferred so it is a good place to be receiving ample dividend payouts. Conclusion The New Perspective Fund is a strong performer within its category, but its category is not well positioned in an environment of a rising U.S. dollar. Investors are better off sticking with domestic U.S. funds with high dividend yields. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to American’s within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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