The impact of the bond election is in focus for Capital Group, along with a broader earnings base for equities

LEADERS and analysts on Capital Group’s fixed income team are more focused on the possible consequences of global elections this year than at any point in previous cycles, said Kirstie Spence, Capital’s fixed income portfolio manager.

“Half the world went to the polls this year, with many elections taking place in emerging markets. This year we focused more on the elections than usual.

“Especially with the U.S. election, it’s important to think about the geopolitical implications, especially if you’re an emerging market investor. “Emerging markets are highly dependent on flows, trade and global growth.”

She added: “It’s about taking a step back and thinking, ‘Is there something significant here that could change the course of a country’s trade or interaction with the world?'”

She said one positive in the current situation is that the U.S. Federal Reserve has room for policy action. “The Fed now has the tools to respond to the economic situation. This is quite important because we have been in a period of low interest rates or quantitative easing for so long.

“I think we will continue to see the market reverse around expectations as the Fed responds to data. I would say that our team belongs to the soft landing camp and has political space, but we realize that the focus now is on the labor market, not inflation.”

On the equities side, Jody Jonsson, senior vice president of Capital Group, expects broader growth in corporate earnings beyond tech sector gains. “I think you could be looking at a slight, rolling correction in the market, where the market itself is not falling too much, but the leadership in technology is changing and other industries are starting to bear the consequences a little bit more… The underlying gains in the S&P 500 will be less depend on technology and more on other industries that will benefit from a lower interest rate environment.”

The Federal Reserve began its easing cycle in September by cutting interest rates by 50 basis points, prompting a rapid rebound in stock markets. Since the beginning of the year, returns on the S&P 500 index have remained high at just over 20%.

Jonsson said the equities team was mainly focused on “hyperscalators,” which refer to companies with IT architectures that can scale with demand. The biggest players in this space are Amazon Web Services and Google Cloud.

During company visits, analysts make every effort to check the benefits of artificial intelligence (AI) applications. “We ask every company we meet how they are using AI, what savings or productivity improvements they see,” Jonsson said.

“We’re basically trying to see if all the AI ​​spending is going to deliver a return. We have examples of situations where even a small implementation results in a 30 percent increase in performance… The productivity increase appears to be in the range of 15 to 40 percent. Another question is whether these results justify the amounts spent.

She said the market has not yet taken into account the use of artificial intelligence in health care and other industries. “We are investing in industrial companies that help build data centers and enable electrification of all chip operations, as well as decarbonization and energy management.

“The market was very focused on the tip of the spear – Nvidia. However, if AI becomes a widespread phenomenon, it will happen across many companies and industries. I don’t think the market is focusing on this at all.

Meritocracy and diversity

The Capital Group manages assets worth over USD 2.7 trillion. It uses an “equity system” for investing, in which portfolio managers and analysts are given portfolio “sleeves” to invest in their best ideas. This is not the case with most companies where the fund is run by a single manager.

At Capital, each manager differs in terms of investing style, education and holding period. Jonsson is the Chief Investment Officer of the New Perspective Fund, the firm’s most established fund with approximately 51 years of experience. He is responsible for the selection of the team, the division among managers and ultimately for the results of the strategy.

The Fixed Income team follows a similar approach, where analysts specialize in sectors or geographies. The group manages approximately $500 billion in fixed income assets.

The Capital Group claims that combining managers with different investment approaches results in a smoother distribution of profits within the strategy.

Jonsson and Spence, who recently visited Singapore, sit on the Capital Group’s management committee, where five out of 10 members are women. Jonsson said: “Our business is predominantly men-led, but Capital has been very active in trying to increase the number of women in the investment group and in senior management positions outside the investment group.

“I have a positive attitude towards this profession for women, because this business is truly a meritocracy. It’s not about who you play golf with or whether you can get your boss to give you a bigger share of the bonus. It is based on what you produce and the results of your investment. We all live or die by the performance of our investments.”

The Capital Group also ensures diversity in employment, not only on the basis of gender, but also, among others, due to education. Diversity, Jonsson argues, enables managers and analysts to approach problems from different angles.

“Groupthink is the worst. To me, the 2008 financial crisis is a classic example of groupthink where (the industry) didn’t listen to the quiet voices that said, “Hey, there might be a problem here.”

She added: “We need people who approach problems from different angles, to the extent that their backgrounds and personal stories reflect that, because that will make us better investors. We’re more likely to see something coming out of left field if we have people who see the world in a different way. To support this, you need to have a corporate culture that allows these voices to emerge.

In a multi-manager approach, each analyst or manager must present his or her ideas. Jonsson said: “We don’t give people a recipe for investing. We tell them, “Here’s your computer and see what kind of investor you are.” Sometimes this is disturbing to some… I am impressed by some of our young analysts because taking action and making an important recommendation takes courage that can result in a purchase worth billions of dollars.