While recognizing that American Funds has some of the most diligent boards of directors in the business, Morningstar analyst Paul Herbert recently issued a report noting five arrears where they could do an even better job of overseeing shareholders' money.

First of all, Herbert applauds American Funds for devoting separate boards of directors to oversee separate groups of the company's funds. He also praises the boards for being run by independent chairmen.

But with many of the firms' funds growing tremendously in asset size, particularly Growth Fund of America, the boards should be considering closing some of them to new investments, Herbert maintains. Also, a number of new managers have been appointed to run the company's funds, but the boards have not been involved in their hiring, according to Herbert.

In addition, the SEC only requires mutual funds to disclose portfolio managers' personal holdings of 5% or more in the funds they run, and only once a year at that. Particularly since American Funds managers are known for investing in their own funds, along with those of their colleagues, Herbert suggests that the company disclose this information regularly.

Fourth, while American Funds carry some of the lowest fees in the business, some of the largest funds at the company cost more than smaller ones. Herbert wants the firm to reconcile these price discrepancies.

Finally, he suggests that American Funds pay its trustees in fund shares rather than cash. "Such a compensation scheme would force directors to have even more skin in the fame, further aligning their interests with those of fund owners," he suggests.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.