American Funds Is Cutting Fees. Several Bond Funds Look More Attractive.

The timing of the cuts is interesting as 12 of the funds with fee reductions are bond funds and bonds have taken a beating in 2022 thanks to rising inflation and interest rates. The popular Bloomberg US Aggregate Bond Index is down almost 10% in 2022. So even though Morningstar rates one of the funds receiving fee-cuts, the $3.3 billion American Funds Multi-Sector Income (MIAQX), five stars for its outperformance, it’s still down 8.2% in 2022 as of April 28.  The fact that its management fee is dropping from 0.42% to 0.33% may be cold comfort to its investors. 

Yet because of the interest rate surge, bonds are more interesting today than they have been in a while. “One of the things that we’ve been encouraging clients to recognize is that the starting yields for [bonds in the Bloomberg US Aggregate Bond Index] is 3.5%, when a year and a half ago it was 1.3%,” says Maddi Dessner, Capital Group’s director of global asset class services. “That will get you a pretty meaningful return for the balance of the year.” So, now is a good time to reward investors who believe the bond carnage is over. 

American Funds historically has been more well known as a stock picking shop, but it has been aggressively moving into fixed income in recent years. Its bond fund assets have more than doubled in the past five years to $500 billion—now almost a fifth of the management company’s $2.7 trillion. Perhaps more impressive, it has received $2.9 billion in new fund flows into its bond funds in 2022 through March 31, making it the top fund company in terms of fixed-income fund flows this year.

The lower expenses are a nice selling point. Among the steepest management fee cuts are, American Funds Corporate Bond (BFCAX), from 0.36% to 0.25%; American Funds Emerging Markets Bond (EBNAX), from 0.55% to 0.46%; and American Funds Short-Term Tax-Exempt Bond (ASTEX), from 0.33% to 0.20%. In equities, two big cuts are for American Funds International Vantage (AIVBX), from 0.60% to 0.48%, and American Funds Developing World Growth & Income (DWGAX), from 0.73% to 0.65%. Most of the other cuts are much smaller, like to the top-performing $11 billion American Funds Strategic Bond (ANBAX), from 0.30% to 0.28%. 

Generally speaking, the smaller the fund is asset-wise, the bigger the fee cut applied, says Dessner. The logic behind this is that larger funds can reduce fees on their own through economies of scale.  

That said, management fees are only a portion of fund investors’ total costs as expense ratios also include administrative and brokerage costs.  So, even though American Funds Multi-Sector Income’s management fee dropped from 0.42% to 0.33% its total expense ratio for its “A” share class was 0.82% prior to the cut, indicating a likely 0.73% ratio post-fee-cut.

That’s a far cry from the 0.04% expense ratio investors pay for the iShares Core US Aggregate Bond ETF (AGG). Yet lowering the fee hurdle should make it easier for American Funds to outperform in the future.

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