By Canada Life | August 31, 2021
Through Global Equity*(Capital Group), a Canada Life™ segregated fund, Capital Group offers a distinctive, multi-manager investment approach designed to help clients pursue their long-term goals. This article explains the approach, and examines how a focus on fundamental research has helped Capital Group grow to become one of the largest privately held investment management organizations in the world. They discuss their views on stock selection, showing how diverse viewpoints come together under The Capital System™.
Advantages of the global equity strategy
The mandate invests in multinational or global companies that have a significant share of sales and operations outside the country in which they’re based. The global integration of its research creates opportunities for insights not captured by a marketplace that largely still views the world in a narrower, regional context. These insights enable Capital Group to build a portfolio with meaningful exposure to economic opportunities in both developed and developing markets, giving the fund the flexibility to invest in multinational companies who offer products and services in a variety of geographic, macroeconomic and currency environments.
Capital Group’s multi-manager approach
Capital Group has an unyielding conviction that superior long-term results stem from portfolios that balance high-conviction ideas with a diverse range of investments. As a result, Capital Group’s proprietary investment approach – The Capital System (the “System”) – is the engine behind all the portfolios they offer and is a primary point of differentiation from its competitors.
Unlike many other investment managers, its portfolio managers are assigned a portion of the fund to manage independently. This system creates a complementary mix of investment approaches, experience levels, backgrounds and areas of focus.
Each investment professional’s portion is driven by their individual area of focus but does not have to achieve a predetermined level of diversification or sector weighting within that portion. One might have a very concentrated portfolio; others might maintain a longer list of investments. Portfolio managers are fully accountable for their ideas, and compensation is heavily influenced by investment results over one-, three-, five- and eight-year periods. Increasing weight is placed on each successive measurement period to encourage a long-term investment approach.
In many instances, analysts manage a portion of a portfolio themselves, which is called the “research portfolio”. Research portfolios can range in size but are generally about 20% of a portfolio’s assets. Directly involving analysts in the decision-making process provides clients with exposure to the analysts' highest conviction ideas, as well as an added layer of diversification. The end result is a diversified portfolio comprising the highest conviction investment ideas of each individual portfolio manager and analyst.
Throughout the process, portfolio managers and analysts share information and opinions with their colleagues and often challenge each other’s investment views. However, a multilayered governance structure oversees the System, enabling professionals to act with confidence while managing their portion to seek optimum long-term results.
Global research capabilities to power a global portfolio
Capital Group’s portfolio managers and analysts conduct thousands of company research visits in emerging and developed markets every year. Typically, they evaluate companies’ management structures, financial strength, resources, products, services, business climate, future earnings and dividends. This on-the-ground research is combined with comprehensive macro analysis, with the firm’s equity and fixed-income analysts working together to pool resources. Other considerations include an appraisal of social, economic, cultural, political, industry and currency factors — all of which may affect the company's financial condition and outlook. Together, its investment professionals are located across investment and research offices around the world and speak more than 40 languages. By developing relationships with business owners, government officials and industry specialists, they’re able to build thorough insight into the market environment and businesses themselves. This enables its portfolio managers to develop true conviction in their investment decisions.
While its analysts typically develop their own proprietary earnings models, Capital Group does not have standardized valuation criteria, a mandatory screening process, or an overriding macroeconomic model. Instead, its analysts are empowered to find the financial model they believe best characterizes the industry they cover. In this way, fundamental, bottom-up research drives the firm's investment methodology.
By identifying the difference between the underlying value of a company and the price of its securities, Capital Group builds portfolios on a stock-by-stock basis, regardless of their size or volatility relative to their benchmark. It focuses on long-term investing, not on short-term market swings. Its analysts look for attractively valued companies that can be core holdings for many years.
Portfolio stock selection characteristics
Issues they consider in their investment decision-making process, in relation to any company in which they invest, include:
- Its competitive position both locally and, where appropriate, globally (e.g., product quality, franchise, production capacity, pricing policies and advertising programs, etc.)
- Projected versus historic earnings, including new income streams
- The vision of top management, its quality and perceived ability to achieve its business goals
- The profitability of different components of the overall business, cash flow and capital structure at future points in time
- The impact of changes in government regulations or in the wider global political arena
When considering an investment, Jeremy emphasizes management, industry positioning and the sustainability and attractiveness of the industry in which the company resides. He prefers businesses with experienced management teams and long-term, durable business models that are industry leaders in innovation, product development and process efficiency.
Jeremy pays close attention to a company’s financial position, including its capital and liquidity levels and long-term cash generation potential. He tends to avoid companies that are over-levered and have a high degree of financial risk, instead pursuing businesses that use their growing earnings and cash flow to raise their dividends consistently and progressively. Valuation is one of the last considerations in Jeremy’s process. While he favours reasonably priced businesses, he says, “I may be willing to pay a higher price for what I think is a sustainable company that can drive dividend growth and provide superior shareholder returns.” Jeremy tends to manage fairly concentrated portfolios, and although his process is predominately bottom up, he uses a macroeconomic overlay to challenge his investment theses.
Leo likes to find companies that he can own for a long time. Management quality is of upmost importance to him. “I want to own great businesses that are run by outstanding managers,” he says. “I have to have faith that the managers and owners of a business do the right thing.” In pursuit of this goal, Leo travels extensively, meeting with management to understand their culture and approach to their business. Leo prefers companies that possess exceptional fundamentals with big market opportunities, and looks for signs of material change in companies before buying or selling their shares. Valuations are not the most important variable when making an investment decision; instead, Leo judges their execution track record over time.
Leo has 20 years of experience specializing in emerging markets. He devotes time to understanding the macroeconomic risks and trends specific to developing countries. This has helped him understand the probability and risks of potential capital loss. Avoiding large investment losses is critical to building a long-term track record.
Carl focuses on businesses that he believes have long-term, sustainable competitive advantages such as market share, first-mover advantage and innovation. He likes to ascertain the strength of the business and then looks at valuations. He is willing to pay more for a company when he feels its growth prospects are strong.
Carl takes an incremental approach to building his portfolio, starting with small positions and adding to them as his conviction grows, or eliminating the investment if the thesis does not hold up. As a result of this approach, he holds a diversified portfolio of about 50 stocks.
“I want a portfolio of stocks that can deliver consistent, strong results over time. To use an analogy from baseball, I would rather get on base hitting singles and doubles than strike out swinging for the fences,” Carl says.
Dawid’s primary investment focus is to find companies that will grow their share of corporate economic value created in the world. He’ll invest – and remain invested in them – as long as they aren’t significantly overvalued using reasonable valuation assumptions that are based on expected future cash flows, known as discounted cash flow analysis.
Dawid believes it’s hard to overestimate how much value a good management team can add or how much an incompetent management team can destroy. This usually happens via their capital allocation decisions. Dawid believes that political and regulatory risks are growing for most companies and pays close attention to these risks. He’s lived across four continents and travels extensively to visit management teams and to assess the macro risks mentioned.
“Companies that generate superior EVA (economic value added, an indicator that shows a company is producing value from the funds invested in it) will generate cash unless they’re growing fast. But even for strong cash generators, I prefer a strong balance sheet and that excess cash gets returned via dividends unless the shares are clearly cheap on the relevant valuation metrics, in which case buybacks are also welcome,” he says. Dawid also invests in companies which may not grow EVA share longer term but where his analysis indicates the company is trading significantly below its fundamental value and where he has a strong thesis as to why the valuation would normalize within a three- to five-year period. Dawid normally holds around 50 investments.
About Capital Group
Capital Group is one of the largest privately held investment management organizations in the world, serving thousands of leading institutions and millions of individual investors. Its roots date back to 1931, when Jonathan Bell Lovelace founded the Capital organization as a research-based company focused on helping investors in the wake of the 1929 Wall Street Crash. He believed that fundamental research is essential to achieving superior long-term investment results. As of June 30, 2021, the Capital Group manages more than US$2.6 trillion in assets and employs more than 8,000 associates globally.
International investing has deep roots within the organization, dating back to 1953 when it made its first investment outside the United States in Royal Dutch Petroleum. A decade later, the firm created what has become an important benchmark for measuring international results: the Europe, Australasia and the Far East (EAFE) Index, now known as the Morgan Stanley Capital International (MSCI) EAFE Index1. Today, Capital is one of the largest active managers of international equities in the U.S.2 and offers investment strategies across the risk spectrum, from broader strategies with significant allocations to emerging markets, to more conservative strategies that focus on income. All of its strategies are actively managed using bottom-up research to identify and weigh the relative attractiveness of companies across markets. Capital Group believes active management through security selection can add significant value in broad international markets.
The views expressed in this commentary are those of this fund manager as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their financial advisor for advice based on their specific circumstances. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Unit values and investment returns will fluctuate.
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