Lipper’s Moeller looks at Capital Group New Perspective Fund
Lipper’s head of Research UK & Ireland, Jake Moeller reviews highlights of a meeting with David Polak, investment director, and Rob Lovelace, principal investment officer for Capital Group’s New Perspective Fund.
There is an increasing number of new entrants in the European mutual funds market that, attracted to the Ucits brand, have been looking to expand and diversify their book of business into a new and buoyant market–notably Chinese and U.S. fund managers. This is a good thing for European investors. It not only increases competition but allows access to strategies with unique styles and compelling track records that hitherto have been unavailable.
Capital Group New Perspective Fund is such a fund. Its sister strategy, which has been running in the U.S. since 1973 as American Funds New Perspective Fund, recently picked up a U.S. Lipper Fund Award for Best American Fund over the ten-year period. The European version of this fund is being launched on October 30, 2015 within a UCITs structure and should be of considerable interest to investors seeking global equities exposure with pedigree and in-built style diversification.
Although Capital may not be well known to European retail investors, it has been around in the US since 1931, it opened its first European office in Geneva in 1962 and is the “C” in the MSCI indices we know today. The “Capital System” that underpins management of this fund has been in place since 1958. Mr. Lovelace (the grandson of the founder) points out that the process was developed following the illness of a key manager; it was born from the reality of the disruption caused by key-person risk and a desire to formulate a durable and more seamless management style.
The portfolio is divided into eight equal “segments.” One segment is managed by a collective pool of analysts (the analyst pool is divided into sector specialities), and the remaining seven segments are each managed by a portfolio manager who presides over another portfolio within the Capital suite. With each segment reflecting the individual style and experience of each manager (there is no defined house process at the individual PM level), Capital Group New Perspective Fund reflects the best ideas of each PM and the entire pool of analysts. This in effect creates a fund-of-funds approach to a global equity portfolio, effectively reducing the risk of what Mr. Polak describes as “isolated decision making.”
Capital Group New Perspective Fund has a clearly defined global mandate that requires any included portfolio stock to have either 25% of its asset base or revenue base outside the U.S. Mr. Polak is quick to point out that this doesn’t necessarily result in a portfolio composed solely of “global champions” or multi-nationals such as Nestlé. Furthermore, the rule is monitored so that, for example, a Swedish bank with 50% of its revenues from Norway, while technically permissible, would be precluded. The key to this process is ensuring that companies in the portfolio have a diversified and broad set of operating revenues that are not subject to the vagaries of any one jurisdiction.
Table 1. Ten-Year Performance of American Funds New Perspective Fund v Lipper Peer Group and MSCI World Growth (to September 30, 2015 in Euro)
Source: Lipper for Investment Management. Note that this is the U.S. version of the soon to be launched European UCITSs vehicle.
The fund has over 250 stocks but still manages to have considerable active share, with strong deviation from both the sector and stock composition of the MSCI AC World Index. This has been the case over time, with large overweighted positions in materials, consumer staples, and telcos in 2005 being replaced by current overweighting in industrials, healthcare, and consumer discretionary (see Table 2). Despite the strong active share, the turnover of the fund is extremely low at 25% annually, with its highest turnover of 50% occurring in the mid-1980s. Mr. Lovelace points out that he has held one particular resource share for 20 years.
Where stocks are favored by all the PMs, duplication of weighting is avoided through simple pro-rating according to the conviction of that stock in their underlying portfolio. For example, a stock favored by all seven PMs may have a lower weighting than a stock favoured by three PMs, if the three PMs have higher exposure to that stock in their individual portfolio. Ultimately, there is the middle-office global investment control group, which monitors for any unintended biases, and Mr. Lovelace as PIO makes any necessary adjustments.
Table 2. Historical Sector Variation of Fund V MSCI AC World Index
Source: Capital Group
Capital has made every effort to break down the performance of this strategy clearly, showing the attribution every year it has run. And there is perhaps some pride in these figures, with the fund beating its index substantially over the long-term (see Table 1). Admirably, Mr. Polak avoids any sense of hubris by quickly accentuating the negative periods (1984-1988, 2011, and 2014 are notable) to ensure that potential investors understand how and why the fund is likely to underperform. He points out the fund has not “dined out on any purple patch” of its history but has been relatively consistent in gathering alpha. Underperformance has occurred where macro-events drive the market; periods such as the Japanese-led rally in the ‘80s, the risk of a European breakup, and the threat of rising rates since 2013 are examples.
Messrs. Lovelace and Polak do not believe there is any particular alchemy going on in the success of this fund. They simply believe it is the slightly defensive nature of these businesses that has built strong global franchises and diversified their revenue streams, offers resilience in drawdown periods, but can still offer exposure to growth–Dominos Pizza or Amazon, for example. The portfolio is thus style agnostic overall while having slightly defensive characteristics.
The turnover of the PMs has been very low. Since 1973 only 19 PMs have been involved with the fund. They are remunerated on a metric balancing one-, four-, and eight-year performance relative to both the benchmark and the Lipper peer group. Mr. Polak refers to the importance of the one-year component for events such as the recent “Black Monday” correction. This forces the PMs to examine these corrections for any important price discovery and for any immediate risks or opportunities. They get together (virtually–they are all based in different countries) in a “swarm” analysis to examine each other’s stocks and offer cross opinions. The swarm also facilitates sell or hold decisions on stocks based on poor short-term performance. Amazon, for example, was held in early 2014 as it fell out of fashion because the thesis was judged to be sound. ASOS was sold after the realization that currency costs were not being passed on to the consumer.
Capital Group New Perspective Fund will be a difficult fund to consider for investors constrained by their own geographical and style remits; however, it offers an interesting methodology to investors seeking a broad exposure to global equities. Its performance and pedigree are very strong, and the humility of the team that appears to quietly go about its business is refreshing.