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Investment Insights

September 2013

The active advantage

Capital Idea: The active advantage can help investors pursue better outcomes.

The average active manager cant beat the index. This phrase has been repeated so many times it almost seems as if its gospel. Actually, it does contain a measure of truth. Taken as a whole, on average, active managers beat their benchmarks only about half the time. But not all active managers are average. Some investment managers, American Funds among them, have distinguished themselves with a proven track record of consistently outpacing broad market returns. Although the debate over the merits of active management and passive investing has raged for quite some time, recent articles in various publications touting index investing have re-ignited the issue. Several of them have cast a negative spotlight on actively managed funds and their fees and returns.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, In this report, well look at how American Funds active equity management has provided clear advantages over index investing during every so they may lose value. meaningful period of time for decades. We believe the study makes a Past results are not predictive of results in future periods. compelling case for our active advantage. More importantly, we think its time to reframe the debate and to focus on investor outcomes.
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Investment Insights
September 2013

The active advantage

The problem with averages


The active-versus-passive debate has been grossly overplayed to the detriment of many fine, actively managed fund shops and to intelligent investment discourse.
Don Phillips, Morningstar

The argument for the superiority of passive, or index, investing over active management has been accepted and adopted by a significant number of academics, consultants and investors. Active management, the argument goes, is unable to outpace a respective index for a variety of reasons, ranging from the drag posed by fees to the efficient-market hypothesis. Those who adhere to that theory contend, in brief, that all information is reflected in a firms share price, making it impossible to beat the market consistently. But much of the literature in favor of index investing uses the average active manager to make the point. And indeed, in aggregate, U.S. equity active managers have not consistently outpaced the Standard & Poors 500 Composite Index.

We believe this is a flawed way to frame the issue, akin to concluding that because the average person cannot dunk a basketball, no one can dunk a basketball. Obviously, some are playing at a higher level, and using the average to characterize an entire industry obscures the fact that there are investment managers that have consistently added value over a variety of market cycles, including American Funds. To be clear, we are not defending all active management. Specifically, we are noting our persistent, long-term added value as an active manager. We believe its important to focus on the qualities associated with success, including alignment with clients objectives, low fees, experienced managers, global research, a history of outpacing indexes and an investment culture thats built to last.

The average active manager cant beat the index True, but not the whole story
Percentage of funds 100%
80 60 40 20 0 20 40 60 80 100 1993 1994 Percentage led index Percentage lagged index

47% of the time, U.S. equity active managers outpaced the S&P 500 Index during the 20 calendar years ended 12/31/12

53% of the time, U.S. equity active managers trailed the S&P 500 Index during the 20 calendar years ended 12/31/12
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Data from Morningstar. Based on calendar-year returns of actively managed funds, excluding the American Funds, whose relevant benchmark is the S&P 500 Index. This universe excludes funds that fell in the Morningstar Moderate and World Allocation categories. Funds with incomplete data were removed from the analysis. For more information on filtering methodology, see General Methodology, page 10.

A long history of active advantage


A note on methodology We analyzed the track records of all of our equity-focused American Funds from 1934 through 2012. Our study encompassed thousands of data points and spans virtually the entire history of the mutual fund industry. In addition, a large accounting firm performed an objective validation of our methodology to ensure accuracy.
Has American Funds added value? We sought to answer this question both to hold ourselves accountable and to seek a way to continually improve our approach. As part of an extensive new study, we analyzed the track records of all of our equity-focused American Funds. In an attempt to be as comprehensive and transparent as possible, results for every fund over every possible one-, three-, five-, 10-, 20- and 30-year rolling period (monthly basis) between December 31, 1933, and December 31, 2012, were included. The data set therefore spans virtually the entire history of the mutual fund industry. Our overall active success rate or the percent of rolling periods in which we outpaced the index was superior for each investment horizon considered, from one year to 30 years. Of course, American Funds track record is not perfect. Its important to acknowledge there have been times when not all of our results have been stellar and times when our funds have lagged the index. But the chart below shows a consistent, long-term record of our funds in aggregate outpacing market returns decade after decade. Indeed, overall results demonstrate that our funds have outpaced their indexes the majority of the time, and actually got stronger over longer periods. The record stands as a testament to The Capital SystemSM and our process of active management.

Our equity-focused American Funds have a long history of outpacing the market Decade after decade, active management has provided investors with an advantage

92%
Historical track record: Percentage of time American Funds led their indexes (19342012) Recent track record: Percentage of time American Funds led their indexes (1/31/0312/31/12; includes one-, three-, ve- and 10-year rolling periods ended in the last 10 years) 1-year Outpaced indexes Total number of rolling monthly periods 3,897 6,804 3-year 5-year 10-year 20-year

98% 83%

57%

58%

62%

69%

77% 67%

73%

30-year 1,974 2,020

1,066 3,971 1,255 4,021 1,377 3,761 1,575 2,834 1,850 6,409 1,815 6,034 1,783 5,134 1,721 3,413

Data from published sources were calculated internally. Numbers of periods are based on rolling monthly data for all funds reducing entry- and exit-point bias and better reflecting the range of entry points experienced by investors. American Funds represents 17 equity-focused funds, in aggregate, including: AMCAP Fund , American Balanced Fund , American Funds Global Balanced FundSM , American Mutual Fund , Capital Income Builder , Capital World Growth and Income Fund , EuroPacific Growth Fund , Fundamental Investors , The Growth Fund of America , The Income Fund of America , International Growth and Income FundSM , The Investment Company of America , The New Economy Fund , New Perspective , New World Fund , SMALLCAP World Fund , Washington Mutual Investors FundSM . For each funds comparable index/index blend, see General Fund Methodology, page 10. Past results are not predictive of results in future periods.
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Investment Insights
September 2013

The active advantage

The persistency question


Persistency is the percentage of time that funds continued to lead their indexes after having led in the previous period.
Can you do it again? If an investment manager has outpaced the index in the previous period, can the manager do so again? Put another way, is the track record the result of luck or skill? Persistency is a measure that can help investors answer these questions. It is the percentage of time that funds continued to lead their indexes after having led in the previous period. The potential benefits of a track record of persistency are clear. While past results are not indicative of future returns, persistency can give investors some confidence that the manager has the potential to help them succeed in the future. Persistency has been relatively abundant for American Funds equity funds. More often than not, our funds have led their indexes and continued to lead in the subsequent period. Their overall persistency advantage increased over longer holding periods. Some critics of active management contend that its challenging to find managers that can continue to provide above-benchmark returns based on past results. We believe persistency is a criterion that investors can use to help select managers with the potential to add value in the future. Other important criteria include alignment with clients objectives, low fees, manager tenure, a history of above-benchmark returns and a sustainable process.

Persistency has been relatively abundant for American Funds Funds have led their indexes and often continued to lead in the subsequent period

96% 80% 62%


Percentage of time American Funds led their indexes in one period and repeated leadership in the subsequent period (19342012)

60%

64%

64%

1-year Outpaced indexes Total number of rolling monthly periods

3-year

5-year

10-year

20-year

30-year

2,363 3,792

2,212 3,682

2,169 3,403

1,402 2,186

710 893

246 257

Data from published sources were calculated internally. Numbers of periods are based on rolling monthly data for all funds reducing entry- and exit-point bias and better reflecting the range of entry points experienced by investors. American Funds represents 17 equity-focused funds, in aggregate. For the list of funds and their comparable indexes/index blends, see General Methodology, page 10.

Improving the investor experience The active advantage can help investors navigate market declines.
When markets are volatile, investors often react by making short-term decisions that can have long-term consequences for their portfolios. Thats especially true during a downturn. Why does that happen? Simply put, for many investors losses hurt more than gains help. American Funds has always emphasized a long-term perspective and the importance of preserving capital during downturns. In contrast, index investing captures 100% of a market decline. We believe the key is to produce results that are less volatile than the results of the broad market. The charts below depict our U.S. equityfocused funds downside resilience using capture ratios, which express the ratio of an investments returns to those of a benchmark during periods of positive or negative index returns. Lower numbers are preferable on the downside, and the chart shows that our U.S. equity-focused funds have often spared investors the full brunt of declines. Capture ratios can help identify managers that are generally defensive and conservative in nature. That can be particularly important during the distribution phase, when downside protection is crucial to a sustainable retirement income portfolio. When building portfolios, its important to select managers whose investment process is oriented to downside resilience and low volatility, both of which can improve the investor experience.

A long history of resilience during downturns Our funds have often shown strength in market declines
American Funds U.S. equity funds average downside capture ratios relative to the S&P 500 Index

3-year (Rolling monthly periods ended 1/31/8012/31/12)


120% 110 100 90 80 70 60 50 40 1980 1984 1988 1992 1996 2000 2004 2008 2012 More downside than the S&P 500 Less downside than the S&P 500 120% 110 100 90 80 70 60 50 40 1980

10-year (Rolling monthly periods ended 1/31/8012/31/12)

1984

1988

1992

1996

2000

2004

2008

2012

The capture ratio measures the extent to which a manager has limited negative absolute returns, relative to the markets decline. Market declines are defined as those months in which the market return was negative. This ratio is akin to a downside beta specifying the percentage of the down market captured by the manager. If, for example, it is greater than 100%, then the manager has trailed in the down market. Conversely, a percentage less than 100% indicates a positive excess return for those market declines; the smaller, the better. Market indexes are unmanaged and, therefore, have no expenses. Data for downside capture are based on monthly returns for Class A shares. American Funds U.S. equity-focused funds represent only those funds (there are seven) whose comparable index is the S&P 500 Index. For the list of funds that fall into this group, see General Methodology, page 10.

Investment Insights
September 2013

The active advantage

Low fees fuel our active advantage


Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.
Russel Kinnel, Morningstar

One of the most important issues for long-term investors is the expense ratio. Expenses matter, and low fees are often cited as one of the benefits of index investing. But low fees arent solely the province of passive investing. American Funds believes lower is better, and the chart below left shows that the annual operating expenses across our equity funds are significantly below the industry average. Thats important for several reasons. Simply stated, costs reduce investment returns. The chart below right shows the dramatic impact a 50-basis-point difference in fees can make over a 30-year period. In this example, a difference of 0.50% cost the investor more than was originally invested. Fees may also serve investors in other ways. In selecting an active manager, a

variety of academic researchers have concluded that the expense ratio has proved to be a strong predictor of future results. In a 2010 report, Russel Kinnel, Morningstars director of mutual fund research, said, Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile. Of course, past returns arent predictive of future results. At American Funds, our primary goal is to provide consistently superior long-term investment results. Low fees are a crucial element in achieving that goal and a demonstration of our alignment with investors. For decades, American Funds has sought to provide quality investment management at a reasonable cost, and we remain committed to doing so in the future.

Lower is better: American Funds annual operating expenses 1.52% 1.33% 1.16% 0.93% 0.76% 0.62% 0.61% 0.77%
American Funds (Class A) Industry average

Whats the difference?


The growth of hypothetical investments of $100,000 over 30 years, assuming an annual growth rate of 8% before expenses and annual expense ratios of 1.00% and 0.50%, respectively Annual operating expenses 1.00% 0.50%

1.27% 1.07%

$761,226 $875,496
$114,270 is the total a 0.50% difference in expenses can mean over 30 years more than the initial investment. Not intended to portray actual expenses and investment results. Your experience will differ.

Growth

Growth-and-income

International/ global equity

Equity-income

Balanced American Funds (Class F-2) Industry average

0.51% 0.41% 0.66% 0.41% 0.56% 0.93 0.90 1.13 0.84 1.02

Source for industry averages: Lipper, based on comparable categories for front-end load funds, excluding funds of funds, as of each funds most recent fiscal year-end available as of December 31, 2012. Due to their significant investments outside the U.S., Capital World Growth and Income Fund, EuroPacific Growth Fund, International Growth and Income Fund, New Perspective Fund, New World Fund and SMALLCAP World Fund are included in the International/Global equity category. The American Funds expense ratios for both Class A and F-2 shares are as of each funds most recent printed prospectus available on January 1, 2013. Expense ratios do not reflect sales charges. American Funds offers plan sponsors flexibility in how they pay for plan operating expenses (such as recordkeeping fees) through six distinct retirement plan share classes. Expenses differ for each share class, so expense ratios will vary. Class F shares are available through financial professionals who typically charge ongoing fees for the services they provide. Please see americanfunds.com for more information.

Translating numbers into outcomes Bottom line: The active advantage can offer investors the potential for greater wealth.
This isnt just an academic exercise. Investors have real needs and goals. In a world of underfunded pension plans and households at risk of running out of retirement income, it is crucial to select an investment manager with a proven track record of consistently outpacing the broad market. The right decision can transform long-term investment outcomes, and mean the difference between success and shortfall. Our analysis looked at investor outcomes from several perspectives. In one, a $100,000 lump sum was spread across American Funds equity-focused funds over a 20-year period beginning on December 31, 1992. In this example, the initial investment would have had an ending value of $626,946, or $170,206 more than the same amount invested in an index blend, or 37% more wealth. We also looked at the outcome through the lens of a 401(k) investor. In this example, an investor contributed $500 a month for 20 years. The same amount was invested in a blend of relevant indexes. The equityfocused American Funds produced an ending value that was $56,365 greater than the index blend, or 24% more wealth. In both cases, the dispersion of results created meaningful value for the investor, and a significant advantage in their pursuit of retirement security or other financial objectives. Whether its an individual saving for retirement, a fiduciary selecting a 401(k) plan lineup, an advisor constructing client portfolios, or a pension plan sponsor addressing underfunded status, the goal is to create better investment outcomes and increase the likelihood of success.

Figures shown are past results for Class A shares with all distributions reinvested and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Unless otherwise indicated, fund results are for Class A shares at net asset value with all distributions reinvested. If the funds maximum sales charge (5.75%) had been deducted, results would have been lower. For current information and month-end results, visit americanfunds.com. The active advantage can be the difference between success and shortfall Equity-focused American Funds provided a significant advantage for investors
Lump sum: Hypothetical $100,000 invested in December 1992 for 20 years (ending values) $700K 600K 500K 400K 300K 200K 100K 0 Index blend American Funds $350K 401(k): Hypothetical $500-a-month investment in December 1992 for 20 years (ending values)

$626,946 $456,740

300K

$290,369 $234,004

37 % more

250K 200K 150K 100K 50K 0

accumulated wealth

24 % more

accumulated wealth

Index blend

American Funds

The 401(k) hypothetical $500-a-month investment represents a total of $120,000 for the 20-year period ended December 31, 2012. Data from published sources were calculated internally. For the constituents of the American Funds and index blend, as well as additional details about the data, see Specific Methodology for Hypothetical 20-Year Investments Illustrations, page 11. The market indexes are unmanaged and, therefore, have no expenses. There have been periods when the funds have lagged their relevant indexes.
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Investment Insights
September 2013

Behind the numbers: The Capital SystemSM


Through the decades, and many challenging environments, Capital Groups active management has provided clear advantages over index investing. The tables on this page and the next show superior results across multiple investment strategies and time periods. We believe the returns make a strong case for a process that is able to add real value for investors, and do so consistently. Our contention, of course, is that the objectives of investors are more likely to be met by The Capital System, our distinctive investment culture, approach and process. The system is built in alignment with client interests, which is further reinforced by a compensation structure that is heavily influenced by results over four- and eightyear periods. We believe that the objectives of investors are more likely to be met by experienced professionals with diverse perspectives, who have the ability to act on their highest convictions, and are supported by a global research network. That approach has served investors well. Our funds have consistently outpaced their benchmarks, provided resilience in challenging environments, produced results with less volatility than the broad market and done so at a relatively low cost. Our consistent approach, in combination with a proven system, has resulted in the superior longterm track record displayed on these pages.

The active advantage

Figures shown are past results for Class A shares with all distributions reinvested and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Unless otherwise indicated, fund results are for Class A shares at net asset value with all distributions reinvested. If the funds maximum sales charge (5.75%) had been deducted, results would have been lower. For current information and month-end results, visit americanfunds.com. Fund-specific active advantage Rolling monthly periods ended 12/31/12
Fund and inception date Growth funds AMCAP Fund (5/1/67) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) EuroPacific Growth Fund (4/16/84) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) The Growth Fund of America (12/1/73) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) The New Economy Fund (12/1/83) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) New Perspective Fund (3/13/73) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) New World Fund (6/17/99) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) SMALLCAP World Fund (4/30/90) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) 1-year 3-year 5-year 10-year 15-year 20-year 30-year

52% 12.77 11.05 1.72 59% 13.32 12.52 0.80 55% 15.42 12.39 3.03 51% 12.91 12.17 0.74 71% 13.73 10.56 3.17 76% 11.35 4.45 6.90 59% 12.52 9.66 2.86

52% 11.64 10.09 1.55 71% 11.65 9.64 2.01 66% 14.48 11.44 3.04 54% 10.94 10.69 0.25 84% 13.14 10.14 3.00 93% 11.38 3.69 7.69 59% 9.91 8.24 1.67

50% 11.66 10.09 1.57 80% 11.06 7.93 3.13 68% 14.43 11.38 3.05 61% 10.27 10.07 0.20 86% 13.15 10.13 3.02 100% 12.39 4.23 8.16 57% 9.02 7.38 1.64

69% 12.92 10.98 1.94 95% 10.87 7.27 3.60 73% 14.45 12.07 2.38 52% 10.36 10.32 0.04 90% 13.53 10.64 2.89 100% 11.23 3.52 7.71 54% 8.33 7.45 0.88

80% 13.59 12.05 1.54 100% 10.92 7.01 3.91 84% 14.79 12.73 2.06 48% 10.77 10.81 0.04 100% 13.81 10.97 2.84 84% 8.96 7.69 1.27

80% 13.57 12.37 1.20 100% 11.02 7.50 3.52 100% 14.74 12.81 1.93 59% 10.36 10.18 0.18 100% 13.79 10.88 2.91 100% 9.30 7.81 1.49

94% 13.59 12.12 1.47 100% 14.40 11.90 2.50 100% 13.47 10.53 2.94

Three ways to put the active advantage to work

First, check assumptions. The evidence shows select active managers, contrary to what some have argued, can and have consistently outpaced broad market returns. Second, revisit allocations. Some portfolios could benefit in the long run from core allocations to flexible, actively managed funds with broad mandates. Third, broaden the criteria generally applied when evaluating investment managers.

People, process, performance and price have long driven the manager selection process. We would encourage the addition of a fifth P to the due diligence exercise persistency. The importance of persistency on investor outcomes cannot be overstated. American Funds has not only demonstrated the ability to provide positive excess returns, but to do so consistently decade after decade.

Fund-specific active advantage Rolling monthly periods ended 12/31/12


Fund and inception date Growth-and-income funds American Mutual Fund (2/21/50) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) Capital World Growth and Income Fund (3/26/93) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) Fundamental Investors (8/1/78) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) International Growth and Income Fund (10/1/08) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) The Investment Company of America (1/1/34) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) Washington Mutual Investors Fund (7/31/52) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) Equity-income funds/balanced funds Capital Income Builder (7/30/87) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) The Income Fund of America (12/1/73) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) American Balanced Fund (7/26/75) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) American Funds Global Balanced Fund (2/1/11) Percentage of time fund outpaced index Fund annualized return (%) Index annualized return (%) Difference (%) 64% 10.55 7.70 2.85 60% 12.14 10.81 1.33 52% 11.20 10.77 0.43 100% 5.65 3.63 2.02 75% 10.07 7.21 2.86 53% 11.46 10.42 1.04 44% 10.72 10.44 0.28 82% 10.00 7.15 2.85 60% 11.28 10.43 0.85 42% 10.77 10.51 0.26 100% 10.41 7.17 3.24 68% 11.87 11.04 0.83 50% 11.35 11.02 0.33 100% 10.32 7.06 3.26 79% 11.93 11.45 0.48 53% 11.46 11.33 0.13 100% 10.04 7.20 2.84 82% 11.95 11.48 0.47 70% 11.52 11.39 0.13 100% 11.83 10.93 0.90 100% 11.14 10.79 0.35 1-year 3-year 5-year 10-year 15-year 20-year 30-year

47% 12.46 12.25 0.21 80% 11.78 8.07 3.71 55% 13.81 12.84 0.97 54% 12.32 12.59 0.27 54% 13.48 12.29 1.19 59% 13.03 11.90 1.13

53% 11.72 11.06 0.66 86% 10.91 6.67 4.24 65% 12.81 11.61 1.20 73% 9.97 9.50 0.47 61% 12.01 10.98 1.03 61% 12.02 10.76 1.26

58% 11.62 10.82 0.80 100% 10.51 5.73 4.78 74% 12.76 11.45 1.31 67% 11.75 10.81 0.94 69% 11.70 10.33 1.37

66% 11.64 10.71 0.93 100% 10.70 5.15 5.55 79% 12.84 11.64 1.20 69% 12.20 11.31 0.89 82% 11.91 10.44 1.47

73% 11.83 10.95 0.88 100% 10.27 5.48 4.79 82% 13.30 12.28 1.02 70% 12.46 11.70 0.76 91% 12.24 10.77 1.47

70% 11.94 10.95 0.99 89% 13.22 12.17 1.05 75% 12.62 11.77 0.85 97% 12.41 10.89 1.52

94% 12.44 11.19 1.25 100% 12.44 11.05 1.39 98% 12.52 11.41 1.11 100% 12.92 11.26 1.66

Both fund and index annualized returns reflect the average of the average annual total returns for all periods. Data from published sources were calculated internally. Returns are from the first month-end following each funds inception date through December 31, 2012. For each funds comparable index/index blend, see General Methodology, page 10.

Investment Insights
September 2013

The active advantage

General methodology
The 17 American Funds equity-focused funds used in our analysis and the relevant indexes/index blends with which they were compared are as follows: AMCAP Fund, The Growth Fund of America, The New Economy Fund, American Mutual Fund, Fundamental Investors, The Investment Company of America and Washington Mutual Investors Fund (Standard & Poors 500 Index); EuroPacific Growth Fund and International Growth and Income Fund (MSCI All Country World ex USA Index); New Perspective Fund, New World Fund, and Capital World Growth and Income Fund (MSCI All Country World Index); SMALLCAP World Fund (MSCI All Country World Small Cap Index); Capital Income Builder and American Funds Global Balanced Fund (60% MSCI All Country World and 40% Barclays Global Aggregate indexes); and The Income Fund of America and American Balanced Fund (60% Standard & Poors 500 and 40% Barclays U.S. Aggregate indexes). All relevant indexes listed are funds primary benchmarks, with the exception of Capital Income Builder and The Income Fund of America. The primary benchmark for Capital Income Builder is Standard & Poors 500 Index; for The Income Fund of America, they are Standard and Poors 500 and Barclays U.S. Aggregate indexes. Some of the aforementioned indexes do not have sufficient history to have covered the lifetime of certain funds; therefore, comparable indexes were used for those periods. These funds, indexes and periods are as follows. For American Balanced Fund, 60% Standard & Poors 500 and 40% Barclays U.S. Government/Credit indexes were used for the period July 31, 1975 (month-end following the funds inception on July 26, 1975), through December 31, 1975. Results for this index blend and the index blend (60% Standard & Poors 500 and 40% Barclays U.S. Aggregate indexes) that was subsequently used were rebalanced monthly. For Capital World Growth and Income Fund, results for the MSCI All Country World Index reflect dividends gross of withholding taxes for the period March 31, 1993 (month-end following the funds inception on March 26, 1993), through December 31, 2000, and net of withholding taxes thereafter. For New World Fund, results for the MSCI All Country World Index reflect dividends gross of withholding taxes for the period June 30, 1999 (month-end following the funds inception on June 17, 1999), through December 31, 2000, and net of withholding taxes thereafter. For EuroPacific Growth Fund, the MSCI EAFE (Europe, Australasia, Far East) Index was used for the period April 30, 1984 (month-end following the funds inception on April 16, 1984), through December 31, 1987; results for the index reflect dividends net of withholding taxes. Results for the MSCI All Country World ex USA Index, which was subsequently used, reflect dividends gross of withholding taxes from January 1, 1988, through December 31, 2000, and dividends net of withholding taxes thereafter. For New Perspective Fund, the MSCI World Index was used for the period March 31, 1973 (month-end following the funds inception on March 13, 1973), through December 31, 1987; results for the index reflect dividends net of withholding taxes. Results for the MSCI All Country World Index, which was subsequently used, reflect dividends gross of withholding taxes from January 1, 1988, through December 31, 2000, and dividends net of withholding taxes thereafter. For SMALLCAP World Fund, the S&P Global <$1.2 Billion Index was used for the period April 30, 1990 (funds inception date), through May 31, 1994. Results for the MSCI All Country World Small Cap Index, which was subsequently used, reflect dividends net of withholding taxes. For Capital Income Builder, 60% MSCI World and 40% Citigroup World Government Bond indexes were used for the period July 31, 1987 (month-end following the funds inception on July 30, 1987), through December 31, 1987; results for the MSCI World Index reflect dividends net of withholding taxes. From January 1, 1988, through December 31, 1989, 60% MSCI All Country World and 40% Citigroup World Government Bond indexes were used; results for the MSCI All Country World Index reflect dividends gross of withholding taxes. From January 1, 1990, and thereafter, 60% MSCI All Country World and 40% Barclays Global Aggregate indexes were used; results for the MSCI All Country World Index reflect dividends gross of withholding taxes from January 1, 1988, through December 31, 2000, and net of withholding taxes thereafter. Results for this index blend and the index blend used prior to it were rebalanced monthly. For The Income Fund of America, 60% Standard & Poors 500 and 40% Barclays U.S. Government/Credit indexes were used for the period November 30, 1973 (funds inception date), through December 31, 1975. Results for this index blend and the index blend (60% Standard & Poors 500 and 40% Barclays U.S. Aggregate indexes) that was subsequently used were rebalanced monthly. In order to compare Capital Income Builder, The Income Fund of America, American Balanced Fund and American Funds Global Balanced Fund with more relevant indexes/index blends, the Morningstar World and Moderate Allocation categories were filtered from the universe of funds in the Standard & Poors 500 Index grouping. Capital Income Builder and American Funds Global Balanced Fund fall in the Morningstar World Allocation Category, and The Income Fund of America and American Balanced Fund in the Morningstar Moderate Allocation Category. Additionally, a total of 20 other actively managed funds were removed from the Standard & Poors 500 Index group due to incomplete data or existing less than one year as of December 31, 2012. All other groupings were pulled by the following benchmarks: Standard & Poors 500 Index, MSCI All Country World Index (gross and net), MSCI All Country World ex USA Index (gross and net) and MSCI All Country World Small Cap Index (gross and net). The groupings were filtered for oldest share class and excluded fund of funds, index funds, feeder funds, lifecycle funds, in-house fund of funds and enhanced index funds. Due to the dynamic nature of the Morningstar database, results for the index groupings may change.

10

All periods were calculated using geometric linking of net-offee monthly returns from Morningstar. The American Funds and index returns were calculated internally in the same manner using monthly returns. Barclays Global Aggregate Index represents the global investment-grade fixed-income markets. Barclays U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market. Barclays U.S. Government/Credit Index is a market-value weighted index that tracks the total return results of fixed-rate, publicly placed, dollar-denominated obligations issued by the U.S. Treasury, U.S. government agencies, quasi-federal corporations, corporate or foreign debt guaranteed by the U.S. government, and U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity and quality requirements, with maturities of more than one year. Citigroup World Government Bond Index represents a comprehensive measure of the total return results of the government bond markets of more than 20 countries meeting certain market capitalization requirements. MSCI All Country World Index is a free float-adjusted market capitalization-weighted index that is designed to measure results of more than 40 developed and emerging equity markets. Results reflect dividends gross of withholding taxes through December 31,

2000, and dividends net of withholding taxes thereafter. MSCI All Country World ex USA Index is a free float-adjusted market capitalization weighted index that is designed to measure results of more than 40 developed and emerging equity markets, excluding the United States. Results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter. MSCI All Country World Small Cap Index is a free float-adjusted market capitalization-weighted index that is designed to measure results of smaller capitalization companies in both developed and emerging equity markets. Results reflect dividends net of withholding taxes. MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalizationweighted index that is designed to measure developed equity market results, excluding the United States and Canada. Results reflect dividends net of withholding taxes. MSCI World Index is a free float-adjusted market capitalization-weighted index that is designed to measure results of more than 20 developed equity markets. Results reflect dividends net of withholding taxes. Standard & Poors 500 Index is a market capitalization-weighted index based on the average weighted results of 500 widely held common stocks. S&P Global <$1.2 Billion Index includes only stocks in developed countries.

Specific methodology for hypothetical 20-year investments illustrations, page 7


The equity-focused American Funds represent a combination of the 17 equity-focused American Funds, as listed on pages 8 and 9. The illustration assumed hypothetical investments equally weighted into the funds for each month as they came into existence. The investments were rebalanced monthly. The index blend represents relevant index blends, weighted according to the primary benchmarks of the American Funds with which they were compared. The investments were rebalanced monthly. MSCI ACWI, MSCI ACWI ex USA and MSCI ACWI Small Cap results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter. MSCI World and MSCI EAFE results reflect dividends net of withholding taxes. For the specific indexes/index blends and weightings, which reflect the benchmark distribution of the American Funds in the illustration, refer to the table below (percentages may not add up to 100% due to rounding). The ending dollar amounts of the hypothetical investments are based on monthly returns calculated internally.

Period

Standard & Poors 500 Index

60% MSCI All Country World/ 40% Barclays Global Aggregate indexes

60% Standard & MSCI All Country World Poors 500/ ex USA/MSCI EAFE 40% Barclays (Europe, Australasia, U.S. Aggregate indexes Far East) indexes

MSCI All Country World/ MSCI World indexes

MSCI All Country World Small Cap/S&P Developed <$1.2 Billion indexes

12/31/923/31/93 3/31/936/30/99 6/30/9910/31/08 10/31/082/28/11 2/28/1112/31/12

54 % 47

8 % 7 7

8 % 7 7

15 %

8 %

8 % 7 7

50 44 41

14 13 13 12

14 20 19 18

6 12

13 12

6 6

11

Investment Insights
September 2013

The active advantage

Figures shown are past results for Class A shares and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Results shown below reflect the deduction of the 5.75% maximum sales charge with all distributions reinvested. For current information and month-end results, visit americanfunds.com.

Results as of June 30, 2013


Funds Inception date

Average annual total returns for Class A shares (%) 1 year 5 years 10 years Lifetime

Expense ratio (%)

Growth funds AMCAP Fund EuroPacific Growth Fund The Growth Fund of America The New Economy Fund New Perspective Fund New World Fund SMALLCAP World Fund Growth-and-income funds American Mutual Fund Capital World Growth and Income Fund Fundamental Investors International Growth and Income Fund The Investment Company of America Washington Mutual Investors Fund Equity-income funds Capital Income Builder The Income Fund of America Balanced funds American Balanced Fund American Funds Global Balanced Fund

5/1/67 4/16/84 12/1/73 12/1/83 3/13/73 6/17/99 4/30/90 2/21/50 3/26/93 8/1/78 10/1/08 1/1/34 7/31/52

14.58 8.83 15.88 18.78 12.69 4.68 14.84 11.22 12.44 15.52 11.59 13.05 13.55

7.50 0.06 3.60 7.46 3.75 0.35 4.13 6.17 1.69 3.83 4.58 6.00

6.69 8.92 7.37 8.72 9.15 11.73 10.31 6.87 9.18 8.79 6.31 6.48

11.20 11.04 13.35 10.76 12.19 8.15 9.28 11.55 10.56 12.21 7.94 12.02 11.74

0.74 0.86 0.71 0.87 0.80 1.07 1.14 0.63 0.82 0.65 0.93 0.62 0.62

7/30/87 12/1/73 7/26/75 2/1/11

4.55 7.25 9.18 5.50

2.52 5.46 6.27

6.91 7.00 6.36

9.42 11.15 10.65 3.62

0.63 0.59 0.63 0.91

Investment results assume all distributions are reinvested and reflect applicable fees and expenses. Expense ratios are as of each funds prospectus available at the time of publication. When applicable, investment results reflect fee waivers and/or expense reimbursements, without which the results would have been lower. Please see americanfunds.com for more information. Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. Small-company stocks entail additional risks, and they can fluctuate in price more than larger company stocks. The return of principal for bond funds and funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. If used after September 30, 2013, this white paper must be accompanied by a current American Funds quarterly statistical update.

Lit. No. MFCPWP-028-1113O CGD/9569-S40518 2013 American Funds Distributors, Inc.