American Funds, the third-largest US mutual fund group, is hot on the heels of rivals Alliance Capital Management LP and Putnam Investments in the race to gather assets in college saving plans.
In the two months since introducing CollegeAmerica, American Funds has gathered US$436 million, according to the public information office of Virginia College Saving Plan, its partner in the plan. Alliance, whose college savings plan has been available since November 2000, has gathered US$2 billion. Putnam's, available since October 2000, has gathered US$1.5 billion.
American Funds, managed by Los Angeles-based Capital Research & Management Co, is benefiting in part from the fact that its stock funds have fared better than more aggressive offerings from Alliance and Putnam, analysts said.
"With American Funds, you may not get rich quick, but you will get rich, and in a bear market you can depend upon them not to lose a lot of money either," said Robert Powell, managing director at Acadient Inc, a Boston-based financial education company. "That's a story advisers love to tell."
College saving plans, also known as 529 plans after the section of the tax code that created them, are a fast-growing segment of the asset-management business. Assets invested in the plans totaled US$7.1 billion at the end of last year and are expected to grow to US$51 billion by 2006, according to Cerulli Associates, a Boston-based consulting firm.
To offer a 529 plan, a money-management firm must be selected by a state as its partner. Firms can sell their plans nationwide.
The plans allow money used to pay educational expenses to grow tax-free. Some states also offer an income tax deduction for contributions to the plans.
To be sure, the pace of flows into college saving plans has accelerated since June, when the tax code was amended to exempt qualified withdrawals from the plans starting this year. Alliance and Putnam declined to say how much has flowed into their plans in the last two months.
American Funds was the top-selling fund group through financial advisers each year from 1990 to 1995, according to Financial Research Corp, a Boston-based consulting firm.
From 1996 to 2000, Putnam or Alliance or both out-sold American Funds as their more aggressive stock funds outperformed American Funds' offerings in the bull market.
Over the last three years, American Funds' stock funds have outperformed 77 percent of their peers, on average, according to fund tracker Morningstar Inc. Putnam's stock funds were beaten by 58 percent of rivals while Alliance's underperformed 60 percent. Putnam is the fourth-largest US fund company.
American Funds was the top-selling broker-sold fund group last year for the first time since 1995. From 1992 though 2001, its stock funds outperformed 80 percent of their rivals on average. Putnam's were in the top 39 percent, Alliance's in the bottom 47 percent.
The long-term performance of its products was "a major factor" in Virginia's decision to select American Funds to run its 529 plan, said Diana Cantor, executive director of the Virginia College Savings Plan.
Virginia's college savings plan allows investors to select from any American Funds product, with the exception of its tax-free bond funds, which are not suited to a tax-deferred account.
Alliance's plan, offered in partnership with Rhode Island, allows investors to chose from two portfolios based on the beneficiary's age, four based on asset-allocation, and nine Alliance mutual funds.
Putnam's plan, a partnership with Ohio, offers an age-based option and three asset-allocation based options. All options include a combination of up to seven Putnam funds.
American Funds was the most popular mutual fund company among independent brokers recently surveyed by Tiburon Strategic Advisors.
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