What's Next for American Funds

Selective doesn't begin to describe the hiring process, which can easily last a year. Dozens of one-on-one interviews gauge a candidate's intelligence and personality -- Capital abhors the "star manager" culture and courts modest types. It's a coveted employer in the industry, and employees rarely leave; on average, Capital's portfolio managers have been with the company for 24 years.

Once they make the payroll, professionals are expected to be bold and creative. Managers are encouraged to stick to their guns when stocks they like get pounded by the market. All analysts run money alongside portfolio managers, so many remain analysts and cover the same companies for decades. "I'd say we know our companies better than anyone else," says Gregg Ireland, a manager for Growth Fund of America and American New Perspective.

Why not close?

Concerns about asset growth haven't stemmed the enthusiasm of advisers and brokers, among whom the American funds are wildly popular. "American Funds is truly a world-class organization," says Mark Schlafly, president of FSC Securities. "It's a group you want to be associated with." Michael Ward, an adviser with LPL Financial, says the funds' consistency and low expenses are typically the top reasons advisers love them. On average, the Class A shares of American's diversified domestic-stock funds charge 0.61% in annual expenses -- less than half the average for all diversified U.S.-stock funds.

Criticism of the shop's refusal to close funds is nothing new. But some fund watchers think this time is different, particularly because assets have ballooned by more than 200% over the past seven years. Morningstar analyst Greg Carlson, for one, thinks that endlessly adding new managers may eventually lose its effectiveness. Already, for example, 11 managers, plus a group of analysts, pick stocks for Growth Fund of America.

Capital's most recent idea for handling its own girth was to divide itself in two. The split, which was finalized in 2006, parceled out investment-management responsibilities to two operationally independent entities: Capital World Investors and Capital Research Global Investors. Each invests according to its own managers' and analysts' ideas and research. Some funds are run entirely by one or the other, and a few are run by both.

Ask an insider why Capital Research doesn't close funds and you'll be told that the firm is serving the best interests of its shareholders. "I think American sees its role as helping as many people with their retirement savings as it can," Carlson says. "Although, obviously, there's a tremendous amount of money to be gained."

Hanks fairly points out that the negative effects of closing funds could outweigh the benefits of keeping them open. As baby-boomers start cashing out retirement savings, he says, closing to new investors could cause a fund to pay out more than it's collecting in new assets. In that case, managers might have to sell stocks at unfavorable prices simply to generate cash. "You're just swapping one set of problems for another," he says.

Ultimately, investors have to rely on Capital's remarkable record of consistent returns, its unique management style and its vow that if assets ever truly overwhelm its system, it won't hesitate to close funds. Because its funds come with sales charges, they aren't appropriate for do-it-yourself investors. But American offers compelling options for investors who work with an adviser, particularly considering its funds' ultra-low expenses. Asset size, however, continues to be a threat worth monitoring.

Then again, looking for innovative solutions to the old problem of outsized assets seems to be embedded in the family's DNA. "The assumption from the outside world is that there's only one option -- it's like a toggle switch, and you're either open or you're closed," Hanks says. "Closing a fund is never off the table, but it would be one of a range of options." Whether the firm will continue to invent successful alternatives is part of the American Funds enigma.

A GUIDE TO AMERICAN'S BIGGEST STOCK FUNDS

Growth Fund of America, $185 billionBuys large, growing, mostly domestic companies. Before 2007, it was in the top 20% of its category for nine straight years. In the first six months of 2008, the fund lost 7%, beating most peers and Standard & Poor's 500-stock index.