American Funds Capital Income Builder: Is It a Strong World Allocation Fund?

By Markets Fool.com


Being a global investor has benefits over sticking with one country. Image source: Getty Images.

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Retirement investors with long time horizons know that it's important to have a well-diversified portfolio that includes investments both from the U.S. and the rest of the world. The Capital Income Builder (NASDAQMUTFUND: CAIBX) from American Funds is a world allocation fund that seeks to provide current and growing income along with capital appreciation by holding a combination of stocks and bonds. With more than $100 billion in assets and nearly 3 million shareholder accounts, American Funds Capital Income Builder is a popular way to put investment capital to work. Below, we'll look more closely at the fund to see if it's right for you.

Capital Income Builder's performance

The Capital Income Builder has produced solid long-term returns for investors. Over the past 15 years, the fund has produced an average annual return of more than 7%, putting it in the top quarter of its peer group of similar mutual funds. More recently, Capital Income Builder has stood out even more, finishing in the top 10% for the past one-, three-, and five-year periods.

As an income-oriented fund, Capital Income Builder has a distribution yield that's on the high side compared to some other funds. Currently, its 30-day yield as calculated for the Securities and Exchange Commission approaches 3%. Occasional distributions of capital gains on investments boost the overall distribution yield even further.

Fees and expenses at Capital Income Builder

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Capital Income Builder's annual expenses depend on which share class you own. The Class A shares available to most investors carry an expense ratio of 0.59%, which is less than half the average among similar funds. However, that ratio includes a 12b-1 fee to cover marketing and sales-related costs.

More importantly, like many American Funds offerings, Capital Income Builder charges up to 5.75% in sales loads when you purchase Class A shares. You can pay a smaller load if you have more money to invest, with lower fees charged for those with $25,000 or more to open an account. Other classes of shares have different fees, and the retirement class options that are available to some 401(k) plans and other institutional retirement funds don't charge a sales load and have expenses that are considerably lower.

What Capital Income Builder owns

Capital Income Builder currently has about 80% of its portfolio in stocks, with most of the rest in bonds and a 2% allocation to cash. U.S. securities make up most of the bond exposure but only about half of the stock positions in the fund, with a nearly 40% allocation to international investments. Consumer staples and financial stocks are fund favorites, but the fund has diversified exposure to a host of different sectors.

On the bond side, Capital Income Builder's holdings are split between U.S. government bonds and corporate bonds, with a small helping of mortgage-backed and other asset-backed obligations. Most of the holdings are investment-grade, and the duration on the securities skews toward the shorter side of the bond market.

Who manages Capital Income Builder?

Capital Income Builder has a large team of managers, with James Lovelace and Joyce Gordon having the longest histories with the fund, dating back 15 years or more. The fund's advisor is Capital Research and Management Company, of which all 13 of its current managers are part.

Is Capital Income Builder a smart buy right now?

One big reason why Capital Income Builder has generated good returns is that it has been fortuitous in its timing. International stocks have lagged behind U.S. equities recently, but throughout much of the fund's history, foreign stocks outperformed their domestic counterparts. In addition, favorable conditions in the bond market have meant that the fund's bond holdings have contributed to overall performance. That could change once interest rates start to rise, although the fund's short-duration focus on the bond side of the portfolio could limit losses.

In addition, Capital Income Builder's sales load is high compared to alternatives with other fund companies. Paying as much as $575 upfront on a $10,000 investment is a big hit, especially when it's just going to the broker who sold you the fund. The fund's returns have nevertheless stayed ahead of its benchmark, and although it takes time to catch up from the downward pressure of a load, Capital Income Builder has been able to get the job done for longer-term investors. Moreover, its annual expenses are fairly low for an actively managed balanced fund.

American Funds Capital Income Builder has a respectable history, but it's far from the only pick that retirement investors should consider. With other funds offering no sales loads and potentially lower fees, it's worth looking at different fund companies to see if what you'll see there is better than Capital Income Builder will offer you.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.