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Friday, May 27, 2022

Capital Group Retains JBL’s Initial Approach

Shortly before his death in 1979, mutual fund titan Jonathan Bell Lovelace imparted a final piece of wisdom from his hospital bed.

As his growing company, Capital Group Cos., was preparing to move its headquarters into a gleaming new high-rise in downtown Los Angeles, Lovelace warned a visiting colleague: “Don’t lose your heads up there in the clouds.”

It’s a sentiment that marked his thinking since he first expressed concerns about the overheated stock market in the 1920s. Lovelace was always known for his cautious demeanor, and that has come to characterize Capital Group. By sticking to a conservative philosophy, the firm grew into one of the largest mutual fund companies in the country.

Despite struggling since the recent financial crisis, the firm has no intention of abandoning its traditional values.

“History is part of our culture and the culture was set by Jonathan Bell Lovelace and by his son, Jon Lovelace,” said Chuck Freadhoff, Capital Group’s spokesman, who has been with the company for 17 years. “When you can trace a history back and see the culture they have imparted, and the fact that the culture remains, history is obviously a very important part of who we are today.”

Indeed, many of the firm’s lasting attributes can be traced to Jonathan Bell Lovelace, known to colleagues as JBL. (In the firm’s early years, office memos were written using employees’ initials in place of names to save space. The practice has stuck to this day, as many current employees are often referred to by initials.)

He was short, slender and fond of three-piece suits, and didn’t have the overpowering personality typically associated with business titans – more of a modest and thoughtful man.

A veteran of World War I with a penchant for math, Lovelace joined Detroit brokerage E.E. MacCrone & Co. in 1919. Citing what he would later call “kindergarten financial research,” Lovelace determined that the stock market growth was unsustainable and sold most of his investments just weeks before the market crashed in 1929.

Lovelace then hopped a train to California, where he had earlier bought a date farm with his brothers, and worked as a financial adviser to companies and individuals, including Roy O. Disney, Walt’s brother; Lovelace helped arrange financing for the seminal animated films “Snow White and the Seven Dwarfs” and later “Fantasia.”

Getting started

In 1930, JBL launched investment firm Lovelace Dennis & Renfrew. The following year, he started an affiliated research organization called Capital Research and Management Co., which would become Capital Group.

The firm was hardly an instant success. Capital Group lost money for most of its first 20 years in business. Once it began turning a profit, JBL, who had been personally absorbing the losses, started selling private stock to associates. Today, nearly 400 associates own stock, which must be sold back to the company when they leave.

In the 1950s, Lovelace’s heart attack led the firm to diffuse leadership responsibilities among multiple managers. The health scare also contributed to a decision several years later by Lovelace’s son to split portfolio management among multiple counselors. That’s now a defining feature of the company.

The son, Jon Lovelace, or JL, wasn’t initially enthusiastic about taking on a larger role in the firm.

“Some mutual fund directors were encouraging the idea of JL’s becoming JBL’s successor, even though Jon Lovelace was not personally interested in being CEO and did not consider himself particularly well-qualified for the role,” wrote Charles Ellis in his 2004 book, “Capital: The Story of Long-Term Investment Excellence.”

The younger Lovelace would later become chairman of Capital Group, but he shunned formal titles, and to this day they are considered unimportant.

The firm also puts little stock in size, figuring that investors will come if the firm can deliver dependable returns. In a rare celebration in 1965, executives one day ordered a couple of bottles of champagne – for its 40 employees – to celebrate when assets under management hit $1 billion.

Capital Group developed a reputation for minimizing losses during market downturns better than competitors – notably during the early 1970s. By the early 1990s, managed assets surged to $100 billion and more than $1 trillion a decade later.

Over the years, Capital Group opened branches across the United States. The firm first opened offices in Europe in 1962 and Asia in 1982. It now has 7,200 employees in a total of 23 offices.

Drawing on the personalities of the Lovelace family, Capital Group is cautious and conservative even when hiring employees, often requiring 20 or more interviews. Until the 1960s, the firm even had a consulting psychologist administer personality tests to applicants.

J. Dale Harvey, who was hired in 1991, interviewed several times in Boston, flew to Los Angeles for multiple interviews and then went to San Francisco for even more.

“Capital is a place where it’s really hard to get a job,” said Harvey, who left in 2007 to start his own firm. “Capital is very careful about selecting stocks for the portfolio and they’re very careful about selecting people to join the team.”

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