It is fitting that Charles D. Ellis' "Capital: The Story of Long-Term Investment Excellence" is coming to market soon after Valentine's Day: Mr. Ellis is clearly smitten with Capital Group Cos., the Los Angeles-based money management giant at the center of his latest book, published by John Wiley & Sons Inc., Hoboken, N.J.
Mr. Ellis, founder of investment industry consultant Greenwich Associates, Greenwich, Conn., spoke with scores of veterans of Capital Group, including its Capital Guardian Trust Co. unit, and came away a true believer.
No organization is better designed for sustained success, as the company's investment results attest, he says. Whether one looks at the past five years, 25 years or 50 years, Capital has consistently delivered top-quartile returns. And despite the industry's mantra of past performance being no guarantee of future results, Mr. Ellis seems willing to bet the house that Capital Group will continue to excel.
Mr. Ellis' confidence rests, in part, on his belief that the corporate culture established by a company's founders largely determines its future path. "Once the die is cast, upgrading an organization is very hard ... (if not) impossible," he writes. "So, the founders and early joiners matter greatly."
Capital Group, Mr. Ellis writes, was blessed to be founded by Jonathan Bell Lovelace — a research-focused investment banker who liked nothing more than to identify and foster "real entrepreneurs." Those qualities were the bedrock of Capital's innovative money management organization, and Mr. Ellis — quoting its veterans along the way — tells the story of milestones in its development.
One such milestone was the 1958 introduction of the multiple-counselor system for portfolio management, combining the strengths of a single manager investing only in his or her "best ideas," with the ability to manage a rapidly growing pool of money that a team of portfolio managers can best pull off. Today, Capital's large American Funds Group mutual fund subsidiary will have a half dozen or more separate parts, each run by a different "investment counselor," Mr. Ellis writes. The system boasts an unusual capacity to "accommodate growth in size and complexity."
In light of its stellar success, it's astonishing no other money manager has copied Capital's "great transformational innovation" in managing portfolios, Mr. Ellis writes. Or perhaps it's not so surprising. After all, only an organization that managed to displace individual egoism with a culture that strives to identify and play to the strengths of the people it hires could make such a system work. Capital eschews organizational titles and keeps formal structures to a minimum to maintain maximum flexibility, Mr. Ellis writes.
Organizations less adept at fostering talent could well have been roiled by some challenges Capital faced. When Coleman Morton — whom many expected to succeed Jonathan Bell Lovelace — lost out to JBL's son, Jon Lovelace, in 1964, it could have raised eyebrows in a firm dedicated to meritocracy. But JL, credited with creating the multiple-counselor system, went on to pioneer Capital's growth over the succeeding decades, while Mr. Morton stayed with the firm.
Readers hoping to learn about a money management legend will find much to enjoy in Mr. Ellis' 318-page book, including anecdotes about pivotal points in the company's development. But anyone looking for a how-to primer for replicating the company's success, or how Capital really works, will be disappointed. For all the details on management philosophy, compensation and investing, the book doesn't make clear how much Capital's egalitarian system requires a towering figure — such as Jon Lovelace — to hold it all together. At many junctures, JL seems to step in to settle disputes or push the organization into new markets, such as international equities, despite doubts of other veterans. A closer look at such questions might be needed to determine the outlook for a company that has seen its employees zoom to more than 6,000 in 2003 from roughly 300 in 1975.
