Best Fixed Income Fund House - Capital Group
M: Morningstar C: Capital Group
M: What is your outlook for 2018 specific to the markets you cover, and how are your portfolio managers positioned to take advantage of opportunities and/or mitigate potential risks?
C: The world economy is experiencing an upturn that is synchronised and multidimensional. Solid consumer spending continues to underpin US growth. Europe appears to have entered a prolonged period of strength. Japan’s economy is seeing steady progress. In the developing world, growth rates vary by country but broadly seem set to outpace developed nations again. This synchronisation of global growth has raised the possibility that the cycle can remain stronger for longer. That bodes well for corporate earnings.
The flipside of more robust growth, however, is that central banks are also more likely to hike interest rates. In this environment, balance and flexibility in portfolios are key. Equities still represent attractive return potential. But at this stage in the cycle, it is important to position for resilience during inevitable periods of volatility. It also means ensuring that portfolios are well-diversified, with the flexibility to pivot to select areas of opportunity. Some companies will fare better than others – careful stock picking driven by fundamental research is key to identifying potential long-term winners.
For fixed income, the view that bonds have to suffer losses when short-term rates rise is a misconception. If rate hikes are gradual, interest earned by bonds can overcome the price impact to deliver a positive return. Taking a broadly diversified approach in fixed income allocation and avoiding excessive credit risk are some ways to mitigate the impact of central bank policy normalisation. Additionally, bonds play a variety of roles, including providing income and capital preservation, and helping to ease volatility. When equities get volatile, bonds typically fare better and provide balance to a portfolio.
M: Can you comment on the major risks facing financial markets, such as rising US rates and elevated asset prices? How do these risks affect your investment decisions?
C: For nearly a decade, developed market central banks were extremely accommodative. Now, policy is tightening. The US Federal Reserve and the Bank of England are hiking interest rates, while the European Central Bank is cutting bond purchases. The sobering reality for investors is that the environment of ultra-low interest rates, which have fuelled economic growth and asset prices, may be changing.
We’re keeping a close eye on inflation and interest rates. If rates climb too quickly, there is less room for cushion with valuations higher than normal. The recent volatility could be a signal that valuations are now more grounded in reality. Whether additional volatility occurs depends on how much tighter financial conditions become. We believe in a “lower for longer” thesis regarding the future level of interest rates, in view of modest global growth and inflation, as well as the attractiveness of US interest rates in a global context.
We are cautious of scope creep among bond strategies. When stocks fall, a true core bond fund should avoid the decline. This enables capital preservation and allows for rebalancing (by selling bonds and buying equities during stock downturns). However, in the search for yield, some bond strategies have taken on more risks and become more correlated to stocks. We are positioning our core bond portfolios for rising volatility, with limited exposure to lower quality credit in order to provide relative stability and diversification. Corporate bond spreads have tightened to record levels amid strong investor demand. Although company fundamentals remain broadly supportive, it wouldn’t be surprising to see credit spreads widen back out from here.
M: What do you think are the success factors in your corporate culture than enables your firm to consistently deliver for investors?
C: At the heart of our culture is a set of values that shape our decision-making and the way we interact with investors and one another. Collaboration, rigorous research and long-term focus are some of our core values that help us pursue superior long-term results for our investors.
Our collaborative culture is fundamental to our investment process, a multi-manager system designed to enable individual investment professionals to act on their highest convictions, while helping to limit the risk associated with isolated decision-making. We go to great lengths to foster open discussion and debate, so that portfolio managers and investment analysts can share their best ideas, have those ideas challenged internally, and challenge the ideas of others.
Intensive global research is part of our investment philosophy. We seek long-term value in fixed income by devoting significant resources to internally generated, fundamental research. Our fixed-income analysts evaluate companies’ management structures, financial strength, resources, products, services, business climate, future earnings and dividends.
Our on-the-ground research (company visits, discussions with suppliers, interviews with federal agency staff, and visits with central bank staff members, politicians, national bankers, regulators and industry leaders) is combined with comprehensive macro analysis, with our equity and fixed-income analysts working together to pool resources. Such a process has the potential to deliver compelling investment ideas and gives portfolio managers a broader and deeper understanding of risk.
Our ownership structure, combined with our active, long-term approach to monitoring and managing results, provides significant incentive for investment professionals to contribute at a consistently high level over many years. As a privately held firm, we want to provide for the smooth transition of ownership to the emerging leaders and successful investment professionals within the organisation. This ensures stability and helps to maintain our long-term focus. This is core to who we are and essential to our ability to generate superior, long-term results for our clients.
M: Can you share some of your future business plans with us, such as the launch of new products?
C: Capital Group has a long heritage of active fixed-income investing, and began managing fixed-income assets for institutional clients in 1973. In Asia, we are building out our fixed-income fund range and most recently launched the Capital Group Global Corporate Bond Fund (LUX). This addition to the Luxembourg-domiciled UCITS fund range is part of a multi-year, strategic plan to give clients based in Europe and Asia, and non-resident clients (Latin American offshore), access to Capital Group’s long-standing US strategies.
The new fund joins a growing range of fixed-income funds launched in the past year, including Capital Group US High Yield Fund (LUX) and Capital Group US Corporate Bond Fund (LUX). The newly launched Capital Group Global Corporate Bond Fund (LUX) provides exposure to investment-grade corporate bonds with no scope creep into high-yield bonds. It adopts a fundamental, research-driven well-diversified and quality-orientated approach to corporate bond investing.
M: Are there plans to further strengthen your investment team? In which areas?
C: We’ve recently strengthened our fixed-income presence in the region with the appointment of James Blair as Head of Fixed Income Investment Services Asia Pacific. James’ appointment complements Capital Group’s strategy in Asia Pacific to expand our investment offerings to investors. James will be responsible for managing fixed-income distribution within the Asia Pacific region, providing strategic advice on asset allocation to clients and implementing fixed-income offerings to investors in the region.
We’ve been expanding our trading team too. We opened trading desks in Singapore and New York to complement our existing ones in London and Los Angeles. Fixed-income trading is fragmented and illiquid. It is also largely conducted over the counter, unlike equities, which are centrally traded on stock exchanges. As such, you need specialists in fixed income trading. Our team of traders have decades of trading experience through various market cycles and events. Each trader specialises in a given asset class and a given sector. Compared to generalists, dedicated sector specialists tend to obtain better liquidity in secondary markets.
Over the past years, we’ve added credit analysts and portfolio managers around the world. Additionally, we are implementing a new, comprehensive technology system that we think will allow us to seamlessly scale fixed-income assets in the future.
Fixed income is a top priority at Capital Group and we will always continue to evolve. Our investment team is focused on staying true to our commitment to clients – bond funds that behave like bond funds, no scope creep and a goal of generating predictable outcomes.
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