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Money manager

Capital Group seeking to rebuild

Shaw Wagener believes the changes help address Capital Group’s performance problems.

Revamps investment teams, drops CapGuardian name

The Capital Group of Companies Inc. is attempting to remake itself in hopes of regaining assets under management, which have declined by $400 billion in the past six years, and repairing its tarnished reputation.

Capital Group, Los Angeles, is still one of the world's largest money management firms, with $1.1 trillion in AUM as of Dec. 31. But senior company officials acknowledge the employee-owned firm, which dates to 1931, often has been slower than competitors to react to the shifting demands of investors.

But changes are afoot.

cCapital Group is restructuring its active equity investment teams.

cThe money manager is introducing collective investment trusts aimed at the defined contribution plan market that are modeled after the firm's well-known American Funds mutual fund family.

cIt is dropping the names Capital Guardian Trust Co., its primary institutional arm; Capital International, the London-based institutional unit; Capital Research and Management, the investment arm of American Funds; and other subsidiaries. Beginning next month, the only company names will be Capital Group and American Funds by Capital Group.

cPlus, it is introducing separately managed accounts for individual investors.

The biggest change goes to the heart of Capital's business: its three active equity investment teams. Previously, two teams chose stocks only for American Funds, while the third worked only on institutional strategies. Now, all three teams work across both segments.

Limited choices

Shaw Wagener, a senior portfolio officer who heads institutional investment efforts and is one of five members of Capital's management group, acknowledged the firm had created silos, limiting institutional investors' choices.

“If you would have come to us six months ago, we would have said, "well, the only way you can have that (Capital World Growth and Income Fund) is if you go buy the mutual fund, and if you don't want to buy the mutual fund, we can't offer it to you,'” Mr. Wagener said in an interview.

“Now what we're saying is, "we're going to deliver that investment service based upon the skill sets of these equity investment groups that have the best chance of success.'”

That best chance of success in the past likely was mutual funds, not institutional strategies.

Data from Morningstar Inc., Chicago, show that for the 10 years ended Dec. 31, American Funds on average had better performance among peers than the institutional side. Ten-year annualized numbers show that American Funds on average have been in the 34th percentile; CapGuardian's institutional strategies were in the 57th percentile. For the three years ended Dec. 31, American Funds ranked in the 38th percentile and CapGuardian, the 52nd.

Giving institutional investors the ability to pick more successful investment vehicles can help the Capital Group regain assets, said Morningstar analyst Janet Yang. “Performance speaks for itself,” she said. A decade ago, “picking Capital was a no-brainer.”

Over the past six years, Capital Group has been bleeding institutional assets, losing almost three-quarters between the end of 2006 — when AUM peaked at $321 billion — and the end of 2012, when institutional assets had dropped to $88.5 billion.

American Funds, which has a big defined contribution plan business as well as retail, has reported net outflows yearly since 2008, and has lost about 20% of its assets.

Just how much the asset drop has affected profits is unclear. The company does not release such data. Spokesman Chuck Freadhoff said the company retains a healthy balance sheet.

Allowing institutional investors greater choice could be a positive for Capital, particularly in cases where the mutual funds have outperformed the institutional strategies long term, said John Wasnock, senior research associate at consulting firm Wurts & Associates, Seattle.

For example, Mr. Wasnock said one of CapGuardian's biggest institutional offerings, the $11.7 billion international equity strategy, returned an annualized -2.3% for the five-year period ended Dec. 31. The American Funds EuroPacific Growth Fund, which uses a similar approach, returned -0.6%, in part because of its greater exposure to emerging markets.

For the 10 years ended Dec. 31, the mutual fund outperformed the institutional strategy by 50 basis points, an annualized 10.7% vs. 10.2%, he said.

Mr. Wasnock said Capital Group's team approach to managing portfolios means it's difficult to track the record of individual portfolio managers and understand why a portfolio is performing poorly.

Capital Group senior officials acknowledge they need to provide more information.

“There's a level of detail and information that, up until this point, we had not delivered in a satisfactory fashion from (clients' and consultants') perspectives — which is really all that matters,” said Kevin G. Clifford, president and CEO of American Funds Distributors and one of the five members of the board of directors of Capital Group.

Mr. Clifford said Capital will soon begin sharing detailed information with institutional consultants as to portfolio managers' investment approaches and holdings.

The bottom line, however, is performance.

Problems addressed

Mr. Wagener attributed the previous poor performance to Capital having too many investment strategies, individual managers overseeing too many portfolios and the company's research coverage not being organized as effectively as possible. All three areas have been addressed, he said.

Mr. Wagener said 85% of Capital Group equity strategies managed for U.S. institutional investors outperformed their benchmarks last year.

At American Funds, 31 of the 42 funds, or 74%, outperformed their benchmarks in 2012, Mr. Clifford said. American Funds had $984 million in net inflows in January, its first month of net inflows since May 2009. (Net inflows in February were $150 million.)

Even with the changes, it's going to be challenging for Capital Group to win back institutional and retail customers, said Geoffrey Bobroff, president and founder of Bobroff Consulting in East Greenwich, R.I.

Mr. Bobroff said performance has been just one of the issues that have plagued Capital Group, a company he said is a victim of changing times.

He said Capital was late to expand its fixed-income offerings, missing opportunities to turn equity outflows into fixed-income inflows. And as other money managers introduced exchange-traded funds, Capital Group has avoided the area, he said.

Indeed, adapting to modern-day competition is behind some of Capital Group's other changes.

While Capital has more than $11 billion in collective investment trusts, none was modeled on its mutual funds. Such modeling is common practice among Capital's competitors, such as T. Rowe Price Associates (TROW) Inc. (TROW), Fidelity Investments and The Principal Financial Group. Capital's first two new CITs — based on the American Funds Capital World Growth and Income Fund and International Growth and Income Fund — were rolled out in January. Six more will launch later this year.

CITs are favored over mutual funds by some defined contribution plans because they can cost less and provide greater transparency in structuring fees and expenses.

Despite the changes under way, Mr. Bobroff said the money manager's best shot at regaining assets would be long-term strong performance.

“People have to be convinced to go back,” he said. “You don't just flip a switch.” n

This article originally appeared in the March 18, 2013 print issue as, "Capital Group seeking to rebuild".