Capital Group Cos. reshuffled scores of its portfolio managers and analysts assigned to its three major equities business units this summer as the downtown–based investment giant seized upon an accelerating inflow of cash from investors shifting to its safe-haven mutual funds, according to an analyst with fund tracker Morningstar Inc. who was familiar with the shakeup.
The reshuffling of managers and analysts was not previously disclosed by Capital Group, a private company that regularly declines to discuss its inner workings. A Capital Group spokeswoman did not respond to a request for comment.
Morningstar Senior Analyst Alec Lucas said in an interview that the move was a kind of “crosspollination” Capital undertook within its sprawling mutual-fund operation in order to improve its “active investment style” where stock-picking is done by portfolio managers.
The move might look ominous to an outsider, but Lucas explained that the reshuffling is something Capital Group has done on a regular basis every five to seven years since the 1980s when the investment firm flattened its management structure.
“This firm is very good at long-term investments and getting ahead of any potential problems,” Lucas observed. “It’s a way of taking people to foster better management when there is unevenness in quality across the firm. It presents a challenge in the short term, but it’s good in the long-term.”
Todd Rosenbluth, senior director of exchange-traded funds and mutual-fund research with New York-based CFRA Research, said the reshuffling of managers and traders “probably has more to do with getting fresh eyes” on investments.
“This is more of a rarity in the industry,” said Rosenbluth, who added that the moves are likely meant as a stabilizing maneuver in a “moderately volatile market” as investors search for a safe harbor.
“They are less volatile than the typical funds,” he said. “This is the type of environment that makes investors gravitate to their strategies.”
Active player
Capital Group is No. 2 on the Business Journal’s 2018 list of largest private companies in Los Angeles County ranked by 2017 revenue, which is estimated at $7.3 billion for the company.
The recent personnel moves at Capital, which may have affected scores of its total workforce of 7,367 as of June 30, comes amid a skittish stock market and a noticeable uptick in inflows of investor cash to its American Funds family of mutual funds.
American Funds, which today makes up about three-quarters of Capital Group’s $1.94 trillion in assets under management, has mainly stuck to actively managed mutual funds while rivals, such as Vanguard Group Inc., have pushed forward with low-cost index funds.
Capital Group is an “active” fund manager – meaning it relies on its portfolio managers to select stocks. Active funds are often viewed as a more expensive approach to running a fund compared to an index fund, which is designed to follow certain rules, so the fund can track a specified basket of underlying investments without as much human input.
Capital Group has seen some rough spots in recent decades, having experienced dramatic ebbs and flows in investor cash during turbulent economic periods. For instance, American Funds had an inflow of $15.1 billion in investor cash in 1993, which turned out to be the most until 2001’s $22.8 billion, according to Morningstar data provided to the Los Angeles Business Journal.
Inflows jumped to $89.7 billion by 2004, but then the company saw an outflow of $16.8 billion in 2008, just as the global economy slipped into the Great Recession.
American Funds saw billions of dollars in outflows annually through 2013, with the peak at $81.4 billion in 2011.
Overall, American Funds saw outflows of $248.5 billion from 2008 through 2016. It last saw an outflow of $4.9 billion in 2016, which followed two years of inflows totaling $7.45 billion. For the first nine months of 2018, American Funds has seen inflows of $22.1 billion, already up 32.5 percent from last year’s inflow of $16.6 billion, according to Morningstar.
With $1.9 trillion in assets under management at the end of June – $1.2 trillion in stock funds, $151.9 billion in bond funds and $403.8 billion in allocation funds, which include both stocks and bonds – American Funds is the largest active stock fund manager, ahead of Boston-based Fidelity Investments, and the second largest fund family overall after Vanguard, based in the Philadelphia area, according to fund data provided by data and analytics firm Refinitiv.
Investment diversity
Capital Group has its roots in Los Angeles, having been founded in 1931 by Jonathan Bell Lovelace, who was involved in drafting the Investment Company Act of 1940, considered the primary source of regulation for mutual funds.
Capital Group pioneered in 1958 its signature “multiple portfolio counselor” or “multimanager” approach to overseeing assets. American Funds’ equity offerings are different from active peers of similar size led by a single manager or team of managers.
Capital’s multimanager investment approach has been refined over the years but essentially blends two management styles: It lets individuals invest in line with their conviction and according to their distinct styles while at the same time benefiting from collaboration, dialogue and debate with their peers.
“Unity in diversity is at the heart of the multimanager system,” Lucas wrote in a Morningstar document describing Capital’s investment approach. It also divides each fund’s portfolio into separately run “sleeves” where managers and analysts make their own buy, sell and sizing decisions so long as it meets the fund’s general mandate.
The company’s assets are now managed primarily through three equity investment divisions and one fixed-income division. Each equity division has roughly 25 to 30 portfolio managers, 50 analysts and 10 traders, according to Morningstar’s Lucas.
The fixed income division has about 30 portfolio managers, 40 analysts and 30 traders.
Charles Ellis, author of the 2004 insider’s book, “Capital: The Story of Long-Term Investment Excellence,” wrote that the investment firm had 350 key people who were partners, or owners – up from 75 in 1990.
“That is certainly bigger today,” said Lucas of the firm’s ownership group that he now estimates at more than 400. No individual owns more than a 2.5 percent position in Capital, he said.
Locally, Capital Group operates two offices in downtown, where it employs 1,300, and another in Santa Monica, with 200 personnel.
This year, Capital Group, which is one of downtown’s biggest tenants, made a $100 million commitment to stay at 400 S. Hope St. for 15 more years. It leased an extra floor in the building to accommodate new associates in sales and distribution. It also locked into a 15-year lease at its 333 S. Hope St. headquarters.
