The following is an excerpt from our Q3 2017 Newsletter...
In September, we visited the offices of Capital Group in downtown Los Angeles. Capital Group manages $1.4 trillion, making it the second largest mutual fund family after Vanguard. We have invested ours and our clients’ savings in Capital Group’s American Funds mutual funds for three decades.
Capital Group has an unusual organizational structure. Decisions at most mutual funds are top-down. Analysts provide ideas and research. Then portfolio managers decide which ideas to pursue (i.e. stocks to buy and sell).
At Capital Group, decisions are bottom-up. Each analyst directly manages fund assets. Capital Group subscribes to the “wisdom of the crowds” approach: (1) decentralize decision-making, (2) empower independent thinkers who have a diversity of specialties, and (3) guard against groupthink.
Considering their credentials, it’s clear why Capital Group wants analysts investing in their undiluted best ideas. We met a biotech/pharmaceutical analyst with a dual M.B.A./M.D., a China consultant who lived and invested there for 20+ years, and a Fulbright scholar managing municipal bonds.
Here are some notes from the trip:
- Growth Slowdown in China?
o Capital Group does not trust the Chinese government’s statistics, so its economists produce their own economic data using cement consumption, retail spending, etc.
o Causes for concern:
§ Credit growth is slowing
§ Approval for infrastructure is slowing
§ Fiscal situation is worsening faster than official data
o Chinese state-run firms tend to overemploy to avoid social unrest. This hinders their ability to make necessary reforms.
- A Senior Portfolio Manager Is an Amazon Contrarian
o Retail stocks are priced as if there is only going to be one place to buy anything in 4-5 years.
o Business history reveals very low odds that Amazon can continue growing at 10-20% per year.
o His “tinfoil hat” theory is that Amazon’s growing power will draw the envy of the government. What killed the biggest, baddest dinosaurs? Not another dinosaur, but a comet. In other words, regulators may be the threat that Amazon’s competitors are not.
- Investors Reaching for Yield
o With today’s ultra-low rates, investors are starved for income and are chasing investments that promise higher yields. Years of economic growth have left them complacent about additional risk. The apparent absence of risk is often when the greatest risk exists.
- John Emerson, President, Capital Group Private Client Services & Former U.S. Ambassador to Germany
o Thirty days after Emerson started in 2013, news broke that the N.S.A. had tapped German Chancellor Angela Merkel’s phone. He joked that he had to change his stock answer on an ambassador’s most important quality: “be a good listener.”