American Funds Challenging Vanguard, Fidelity

American Funds is in second place amongst industry leaders, outdoing Fidelity and coming up close behind Vanguard. This repositioning of mutual fund giants illustrates a "seismic shift" that has been hitting the mutual fund industry, according to The Financial Times.

The surprising part of this whole shift is the fact that American Funds has managed to overcome its competitors while offering fewer funds than both Fidelity and Vanguard. By the end of 2005, American funds had a stable of 31 funds, while Fidelity had 329 and Vanguard 103.

American's success is result of the bear market and the recent market-timing and late-trading mutual fund scandal that left many investors feeling fed-up.

Kunal Kooper, director of fund analysis at Morningstar, said, "American Funds has been successful because it provides conservatively managed, generally low-cost funds that haven't burned investors with sharp losses. The company's stewardship and shareholder focus is very high. Its large-cap value focus, guided by sensible strategies, has done well to preserve capital while maximizing long-run returns."

American Funds fees are actually higher than Vanguard's, which could explain why Vanguard is still in first place. However, the fees are in the same ballpark as Fidelity's.