CapGuardian in turnaround mode

Capital Guardian Trust Co. had $43.9 billion under management at the end of October — less than a third of what it had at its peak four years ago — but company officials have faith that a recent reorganization will reverse the veteran money manager's course.

In a rare interview at the company's Los Angeles headquarters, Shaw B. Wagener, chairman of Capital Group International Inc., Capital Guardian's parent, gave an inside view of how Capital Guardian officials plan to regain clients and assets under management.

Mr. Wagener said the reorganization, which was finished this summer after several years of work, is aimed at across-the-board improvements, from investment returns to sales and servicing.

Key to that effort is to improving the performance of some investment strategies. “We did have investment results that were disappointing both to ourselves and clients in some areas, so we've had redemptions related to results,” said Mr. Wagener.

The U.S. equities strategy, for example, returned 6.23% for the year ended Oct. 30 compared with the 8.09% return for the Standard & Poor's 500. For the five years ended Oct. 30, the strategy had an annualized -2.04% compared with the benchmark's 0.25%. The strategy had more than $3 billion in assets at the beginning of 2011, but lost almost half of that when the New York State Common Retirement Fund terminated its $1.2 billion account with the money manager in March.

Other key strategies, however, have performed better than their benchmarks. The company's largest strategy, the $23 billion non-U.S. equity strategy, returned -3.26% for the year ended Oct. 30 compared with its benchmark, the MSCI Europe Australasia Far East index, which returned -4.08%. Over the five year period, the strategy had annualized returns of -1.65% against the benchmark's -2.41%.

Capital Guardian had 354 clients at the end of September, down from 464 at the end of 2007.

Company executives hope improved performance will help prevent client terminations, like its termination by the $9.6 billion Oklahoma Teachers Retirement System, Oklahoma City, in September. Capital Guardian had managed a $346 million international growth equities separate account for the plan.

“We don't like to make snap judgments, but we'd been watching their short-term performance and it's a continuation of a larger trend of underperformance,” said James Wilbanks, executive director of Oklahoma Teachers.

As of Sept. 30, the strategy's one-year performance was -11.97% compared with -10.81% for its benchmark, the MSCI All Country World index, ex-U.S., according to Capital Guardian figures. For the five-year period ended Sept. 30, the mandate returned an annualized -3.18% vs. the benchmark's -2.31%.

Capital Guardian's reorganization won't affect the firm's team investment approach, in which strategies are managed by multiple portfolio managers. There are no investment stars in the employee-owned universe of The Capital Group Cos. Inc. Even Mr. Wagener acts as a portfolio manager, despite his executive status.

The company's investment philosophy focuses on an active core equities approach, holding stocks for the long term for maximum appreciation. That philosophy dates to the early 1930s when the original company — Capital Research and Management Co. — offered its first mutual fund.

Mr. Wagener said Capital Guardian put the finishing touches on a several-year project of realigning portfolio managers to ensure they are not spread too thin.

Managers now have responsibility for a maximum of three investment strategies, compared with five or six previously. “The mantra we used was: Fewer mandates per manager and fewer managers per mandate,” Mr. Wagener said. That freed up portfolio managers to spend more time making their investment decisions.

The realignment of portfolio managers was achieved by reducing the number of strategies offered to 35 now from 62 in 2008. Mr. Wagener said Capital Guardian executives realized the firm was offering too many strategies.

“We believe focus wins every time,“ said Ted Samuels, Capital Guardian's president. “We believe depth wins more often than breadth in terms of the investment perspective.”

Another change, Mr. Wagener said, is that analysts have been condensed into related groups to reflect the realities of the world. For example, Japanese analysts, who used to comprise an independent team, now are integrated into the North Asia group because of the huge sales that Japanese companies are making in China and other Asian countries.

Part of the reorganization also involved combining the Capital Guardian and The American Funds client service and sales units into a single entity. Previously, Capital Guardian and the distribution arm of The American Funds — the mutual funds run by Capital Research and Management — had their own separate institutional efforts.

“We are now unified,” Mr. Wagener said. “It used to be in the old days, when an institutional client would want to talk to us about mutual funds, it would be a whole different group who would come and talk to them. If they wanted to talk about a separate account for a defined benefit plan, it would be a whole different person who would talk to them about that.”

The new unit — Capital Group Institutional Investment Services — helps both Capital Guardian and The American Funds coordinate sales and servicing efforts.

Mr. Wagener said company executives were slow to recognize that they needed to merge sales and servicing staff to meet the changing realities of the industry.

Institutional investment consultants say, however, that part of Capital Guardian's problem — and those of its sister companies — stems from the fact that company officials have not accepted the changes in today's investment environment.

One consultant, who spoke only under the condition that his name not be used, said Capital Guardian is too attached to its belief of investing in core stocks. “The problem with that view is that most plan sponsors have come to the conclusion that core investing equates to passive investing,” the consultant said. “Few big sponsors use active core strategies anymore.”

Mr. Wagener remains unapologetic about Capital Guardian's belief in the core approach and dismisses the notion that core means passive. “Core means being able to look at the entire range of things to invest in — and sometimes its based upon value and sometimes it's based upon growth — and invest on that basis,” he said.

“So the one thing we've been absolutely clear on is we're active managers. There are a number of our competitors who have grown and become quite large, actually, who wouldn't actually have an investing philosophy per se, they just have a range of products.”

The Capital Group companies are not on the recommended list of consultant Alan Biller and Associates, Menlo Park, Calif., said Matthew Zuck, director of research. In addition to investment performance issues, Mr. Zuck said he was concerned that the company doesn't close mutual funds when they get too big, citing the more than $130 billion Growth Fund of America.

Mr. Zuck said the company instead adds more portfolio managers, and then the known portfolio team becomes partially unknown. He said Capital has some great investment teams, but it's impossible to fully monitor the situation when unknown teams are added to the mix.

Mr. Wagener did not address directly the Growth Fund of America, but said Capital has closed funds in the past when necessary.

Many of its mutual funds have suffered net outflows following market declines over the past several years. Data from Lipper Inc. shows the funds had $65.4 billion in net outflows for 2011 through Nov. 17, up from $55.9 billion in all of 2010.

The success of Capital Guardian and other Capital Group units over the next five to 10 years might depend on whether equities recover, said independent fund consultant Geoffrey Bobroff, East Greenwich, R.I.

He said the Capital companies have been hurt particularly by the decline in domestic equities over the past several years and investors' retreat into fixed income. “Their market has been hit by volatility,” Mr. Bobroff said.

But Capital Guardian's Mr. Samuels said part of the problem is that institutional investors have an increasing focus on short-term performance.

“One of the trends that we think is potentially injurious to clients is the shorter and shorter time frame that many investors and institutions have,“ Mr. Samuels said.

“It is inconsistent with the way that we think our competitive advantage plays out, but also very inconsistent with the nature of the assets themselves. So we really do want to help the industry move back to a longer-term focus — not because of the results, but because that's our mission.”

Mr. Wagener said Capital Guardian is aware of the shift from domestic equities and is actively promoting its various international strategies. He said 43% of the company's assets under management come from international mandates.

Mr. Wagener said Capital Guardian executives also want to change the perception that the company only does equities, noting 20% of Capital Guardian's assets are in fixed-income strategies.

“We think we complement the oligopoly in fixed income today of PIMCO, WAMCO, BlackRock,” he said. “It's just that going all the way back, we were just perceived as being an equity place. I definitely understand the perception, but we've been doing fixed income for 30 years.”