The impact of elections on bonds in focus for Capital Group, along with a broader earnings base for stocks

MANAGERS and analysts at the Capital Group’s fixed-income team are more focused this year on the possible repercussions of elections globally than at any other time in previous cycles, said Kirstie Spence, Capital’s fixed-income portfolio manager.

“This year, we’ve had half the world going to the polls, and many of the elections have been in emerging markets. We’ve been more focused on elections this year than normal.

“Specifically on the US elections, it’s important to think about the geopolitical consequences, particularly if you’re an emerging markets investor. Emerging markets are very dependent on flows, trade and global growth.”

She added: “It’s about taking a step back and thinking: ‘Is there something meaningful here that may change the course of how a particular country conducts trade or interacts with the world?’”

She said one of the positives in the current environment is that the US Federal Reserve has room for policy action. “The Fed now has tools to respond to the economy. That’s quite powerful because we’ve been in such a low-rate or quantitative-easing period for so long.

“I think we’ll continue to see the market flip-flop around expectations because the Fed will be responding to data. I’d say that our team is in the soft-landing camp with policy room, but we’re cognisant that the labour market is now in focus, more than inflation.”

On equities, Jody Jonsson, vice-chair of the Capital Group, expects earnings growth among companies to broaden, beyond technology-sector earnings. “I think you could have a little bit of a rolling correction within the market, where the market itself doesn’t go down a lot, but technology leadership shifts and other industries start to carry the water a bit more... The base of earnings of the S&P 500 will be less driven by technology, and more by other industries that will benefit from a lower-rate environment.”

The Federal Reserve kicked off its easing cycle in September with a 50-basis-point reduction in interest rates, and stocks quickly bounced. Year to date, returns from the S&P 500 remain strong at just over 20 per cent.

Jonsson said a key focus for the equities team has been “hyperscalers”, which refer to companies with IT architecture that are able to scale up with demand. The biggest players in this space include Amazon Web Services and Google Cloud.

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In company visits, analysts take pains to ascertain the benefits of artificial intelligence (AI) applications. “We ask every company we meet how they use AI, what savings or productivity improvements are they seeing,” said Jonsson.

“We’re basically trying to validate whether all the spending on AI will deliver a return. We get examples of where even a small deployment results in a 30 per cent gain in efficiency… The gain seems to be in the order of 15 to 40 per cent in productivity improvement. Whether those results justify the amounts spent on it is another question.”

She said the market has also not yet taken into account the use of AI in healthcare and other industries. “We have investments in industrial companies that are helping to build data centres and to enable electrification to run all the chips, in addition to decarbonisation and energy management.

“The market has been very focused on the tip of the spear – on Nvidia. But if AI is going to be a thing, it will be so for many companies and industries. I don’t think the market is focused on that at all.”

Meritocracy and diversity

The Capital Group manages more than US$2.7 trillion in assets. It applies the “Capital System” to investing, where portfolio managers and analysts are given “sleeves” of a portfolio to invest in their best ideas. This is unlike most firms, where a fund is run by a single manager.

At Capital, each manager differs in terms of investing style, background and holding period. Jonsson is principal investment officer for the New Perspective Fund, the firm’s most established fund with a track record of around 51 years. She is responsible for the team selection, the allocation among managers and, ultimately, the strategy outcomes.

The fixed-income team employs a similar approach where analysts specialise in sectors or geographies. The group manages around US$500 billion in fixed-income assets.

Capital Group says the combination of managers with different investment approaches results in a smoother pattern of returns for a strategy.

Jonsson and Spence, who recently visited Singapore, are on the Capital Group management committee, where five of 10 members are women. Jonsson said: “Our business is predominantly male, but Capital has been very proactive in trying to increase the number of women in the investment group, and in senior leadership positions outside the investment group.

“I’m so bullish on this profession for women because the business is truly a meritocracy. It isn’t about whom you play golf with, or whether you can get your boss to give you a bigger share of the bonus. It’s based on what you produce, your investment results. We all live or die by our investment results.”

Capital Group also takes pains to ensure diversity in hiring, not just in gender but also in educational backgrounds, among others. Diversity, says Jonsson, enables managers and analysts to approach issues from varying points of view.

“The worst thing is groupthink. To me, the 2008 financial crisis is the classic example of groupthink, where (the industry) was not listening to the quiet voices who were were saying: ‘Hey, there may be a problem here.’”

She added: “We need to have people who approach problems from different points of view, to the extent that their backgrounds and personal stories are reflections of that because that will make us better investors. It’s more likely that we’ll see something coming out of left field if we have people who look at the world in different ways. To foster that, you have to have a corporate culture that allows those voices to come out.”

In the multi-manager approach, each analyst or manager has to assert his or her ideas. Jonsson said: “We don’t give people a formula for how to invest. We tell them: ‘Here’s your computer and you figure out what kind of investor you are.’ Sometimes that’s unsettlling to peple... I’m impressed with some of our young analysts because it takes boldness to step up and make a big recommendation that we may end up buying billions of dollars’ worth of.”