Steven Smith, investment director, reveals how Capital Group New Perspective strategy has outperformed in a range of market conditions
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Investors have had to contend with profound uncertainty in recent years. This uncertainty has been set against some vast and enduring shifts in the global economy – digitisation, shifting demographics, and climate change. The right investment for one moment may be the wrong investment for the next.
IN THIS EDITION
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Risk factors you should consider before investing: • This material is not intended to provide investment advice or be considered a personal recommendation. • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. • Past results are not a guide to future results. • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful. • Depending on the strategy, risks may be associated with investing in fixed income, derivatives, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems. This material, issued by Capital International Management Company Sàrl (“CIMC”), 37A avenue J.F. Kennedy, L-1855 Luxembourg, is distributed for information purposes only. CIMC is regulated by the Commission de Surveillance du Secteur Financier (“CSSF” – Financial Regulator of Luxembourg) and is a subsidiary of the Capital Group Companies, Inc. (Capital Group), also authorised and regulated in the UK by the Financial Conduct Authority. While Capital Group uses reasonable efforts to obtain information from third-party sources which it believes to be reliable, Capital Group makes no representation or warranty as to the accuracy, reliability or completeness of the information. This communication is not intended to be comprehensive or to provide investment, tax or other advice. © 2022 Capital Group. All rights reserved.
In this Focus guide, we hear from Steven Smith about how Capital Group New Perspective strategy has a proven track record for steering a course through uncertainty and identifying those businesses that are on the right side of global change.
© 2021 Incisive Business Media (IP) Limited
For Professional Clients only
In this guide, we explore the fund’s strategy in detail and analyse how it seeks to tackle the uncertainty of today’s market while also matching investors’ sustainability expectations.
The global pandemic has left capital markets facing radical uncertainty.
Mike Fox and Rachid Semaoune on sustainable global credit investing
The pursuit of yield in sustainable credit
Focus is a publication that aims to bring you face-to-face with a selection of key investment managers, advisers and providers from across the institutional pensions market.
Focus is a publication that aims to bring you face to face with a selection of key investment managers, advisers and providers from across the institutional pensions market.
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the interview
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However, Steven Smith, investment director at Capital Group, argues that globalisation is not dead – just different. Indeed, global trade is no longer only about the flow of physical goods around the world. Increasingly it is about digital transactions online.
he past few years have brought an abrupt turnaround in the march of globalisation. Rising nationalism, tariffs and trade barriers, plus the impact of the pandemic on global supply chains, have brought shifts in global trading relationships.
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An all-weather portfolio
“It's about services,” says Smith. “It's about intangible flows of data and information flowing around the world. Companies are adapting, but they remain global in terms of their production facilities and customer bases.”
The New Perspective strategy has a focus on investing in multinationals and seeks to capture changes in global trade, so it has a relationship with globalisation. However, its investment approach is not dictated by identifying top-down trends.
Alistair Wilson, partner and head of institutional business at TwentyFour, expects ESG integration to be an area where pension trustees will rely on their fund managers to “do the heavy lifting”.
“We used to talk about people, process and performance, but today ESG is the single biggest factor we discuss in meetings with trustees and consultants,” Wilson says. “It’s such a big topic for pension schemes today. The larger ones particularly are being very proactive, but they are still looking for the fund managers to come up with the solutions.”
The ability to look beyond short-term noise and short-term volatility is one of the most important ingredients to outperforming over the long term
The New Perspective strategy is focused on multinationals ranging from small- to medium-sized potential future global champions all the way up to today’s global champions. This opportunity set combined with Capital Group’s unique approach to portfolio construction has allowed the strategy to show impressive resilience over the past 49 years, says Steven Smith
has helped drive risk asset valuations ever higher despite the damage wrought by COVID-19, compressing yields and making portfolio income distribution objectives harder to achieve in both equities and fixed income.
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THE INTERVIEW
Digital transformation has occurred predominantly as a result of advancements in semiconductors, the cloud and software, he says. Of these, semiconductors are the backbone, providing the processing power for the cloud.
“The ability to look beyond short-term noise and short-term volatility is one of the most important ingredients to outperforming over the long term,” he says. “We remunerate our portfolio managers and our investment analysts primarily on their eight-year relative return.”
The result is a portfolio that is well placed to weather a range of different environments over the medium to long term. Smith is clear that the strategy is not growth or value, as it has performed well in both environments. He argues that over the longer term, in general capital simply flows to the highest conviction investments, regardless of geography, sector, type of company or investment style.
Smith also emphasises that the strategy looks beyond short-term volatility. Portfolio managers won’t be distracted by, for example, a spike in inflation or a single quarter’s GDP figures.
Weathering different environments
As such, during some periods of heightened volatility, the strategy might look eerily quiet. That’s because it is deliberately not positioned for a single type of environment, or outcome, such as high or low inflation. It's well-balanced by geography, sector and style. Different stocks in the portfolio will perform differently at different times and in different parts of the cycle.
In the longer term, there are implications from a changing interest rate environment, higher inflation and slower economic growth.
The New Perspective strategy has a history of resilience in falling markets. Although past performance is no guarantee of future returns, it is interesting to note that the strategy has consistently captured less than 100% of the downside over meaningful time frames throughout its 49-year history. Yet that defensiveness hasn't come at the expense of lagging markets when they rise. It’s a “lovely asymmetry”, says Smith.
Resilience in falling markets
As such, the challenges presented by today’s volatile conditions do not spook the portfolio managers. They have lived through it before, and the investment process has proved resilient.
Fund managers will find themselves required to support pension trustees as net zero deadlines draw nearer
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IN-DEPTH Q&A
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Charlene Malik, portfolio manager
INTEGRATING ESG
TwentyFour Sustainable Multi Sector Credit Fund
SUSTAINABILITY, VOLATILITY, AND THE PURSUIT OF RISK-ADJUSTED RETURNS
Alistair Wilson, partner
TRANSPARENCY VERSUS RELEVANCY
Instead, the portfolio’s composition reflects what emerges from global, fundamental research. Digital transformation and disruption, for example, has been a strong theme but is derived from analysing the activities of individual companies.
“What we're not doing is going into a dark room at the start of a decade and trying to come up with the next five, six, seven long-term secular trends and structural changes in the global economy,” says Smith. “The themes are organically derived from the bottom up.”
He adds: “The cloud is very much in its early stages as an industry, with a large and growing total addressable market as companies start to shift their IT spend. And the software provides the brains to the cloud.”
The strategy’s bottom-up approach does not only lead it to the technology sector. Smith points to transformation in the health care sector, where innovation in medical devices through miniaturisation, sensors, connectivity and data management is opening significant new markets in heart valves, diabetes management and surgical robotics.
Smith also points out that the strategy is structurally flexible and has a deliberately broad opportunity set. For example, the strategy’s top 20 positions may also include a bank, an insurance company and traditional pharmaceutical companies, as well as a heating, ventilation and air conditioning company.
Past results are not a guarantee of future results.
A proven track record of consistent excess return across a variety of different market environments and cycles
New Perspective strategy since inception in 1973
Up/down markets
Upside and downside capture ratios
Value vs. Growth
Average rolling three-year excess returns p.a. in different style environments
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Inflation
Average rolling three-year excess returns p.a. in different inflationary environments
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What we're not doing is going into a dark room and trying to come up with the next five, six, seven long-term secular trends
As at 31 March 2022. Returns in US$ terms. Results shown for the Capital Group New Perspective Composite (inception: 31 March 1973) are asset-weighted and based on initial weights and monthly returns. Relative returns calculated geometrically for the Capital Group New Perspective Composite, compared with MSCI All Country World Index (ACWI) (with net dividends reinvested) from 30 September 2011; previously MSCI World (with net dividends reinvested). Net of management fees and expenses for a representative Luxembourg fund share class (Z), applying the maximum Total Expense Ratio (TER). Please visit capitalgroup.com for further details. Sources: Capital Group and MSCI, unless otherwise specified. 1. MSCI ACWI (with net dividends reinvested) from 30 September 2011; previously MSCI World (with net dividends reinvested). 2. Relative return of MSCI ACWI World Growth and MSCI ACWI World Value (with net dividends reinvested) used to determine when “value outperforms growth” and “growth outperforms value” from 30 September 2011; previously MSCI World (Growth and Value). 3. Based on US inflation rates using the Consumer Prices Index (CPI). Source: FactSet
The global economy appears to be going through a period of structural change and below-index relative returns for the strategy are not uncommon over shorter time periods. As with all investments the value of them can go down as well as up. Smith says that the strategy’s structural flexibility is designed to deliver a durable outcome over the long term. If the current environment persists, the strategy has the flexibility to reorientate, pivot or shift over the long term to capture different opportunities through company selection.
In the longer term, there are implications from a changing interest rate environment, higher inflation and slower economic growth. Smith says that if the current environment persists, the strategy has the flexibility to reorientate, pivot or shift over the long term to capture different structural opportunities through company selection.
Integrating ESG
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Seeking to capture long-term opportunities with a truly diverse approach
A flexible strategy that is able to reorientate over the long term to help capture different opportunities
Market outlook
Integrating ESG:
SNAPSHOT
Capital Group New Perspective strategy
Secular growth
Long-term disruptors
• Cloud computing and digital infrastructure • E-commerce, digital media and entertainment • Electrification of vehicles • Transformational health care
Stable foundation
Potentially resilient or defensive businesses
• Steady compounders • Subscription models • Networks with annuity-like cashflows • Smart industrials • Drivers of sustainability
Cyclical growth
Near-term cashflows
• Financials • Travel and aviation • Leisure and hospitality • Consumption • Construction and infrastructure
Inflation mitigation
Pricing power
• High and stable gross margins • Strong competitive positions • Inelastic demand • Valuable brands • Hard and soft commodities
As at 31 March 2022.
Staying relevant during decades of transformational change
Nearly half a century of identifying long-term investment opportunities arising from changing patterns of global trade and secular shifts in the global economy
As at 31 December 2021. Sectoral peak exposures as per annual reports, based on the representative account of the Capital Group New Perspective strategy. Peak exposure is calculated by including relevant companies within the following sectors. 1970s: nuclear, petroleum, services & equipment and materials. 1970s & 1980s: data processing & reproduction, electrical & electronic, electronic components & instruments, appliance & household durables, recreation & other consumer products. 1990s: telecommunications, electronic components, electrical & electronic, broadcast & publishing, wireless telecommunication services, data processing & reproduction and appliances & household durables. 2010s: MSCI IT sector and internet & direct marketing industries. 1. Emerging markets include frontier markets and non-index markets. Data is based on equity holdings of the representative account of the strategy. Sources: Capital Group, MSCI, FactSet
A proven track record of investing early in global champions
Market cap of New Perspective’s top 20 holdings as at 31 December 2021 (US$bn)
Past results are not a guarantee of future results. Examples shown for illustrative purposes only. This information has been provided solely for informational purposes and is not an offer, or a solicitation of an offer, or a recommendation to buy or sell any security or instrument listed herein.
Outcome: a strategy for different market conditions
With a proven track record of excess return generation in up and down market cycles
Outcome: a flexible, core strategy for different style-driven markets
New Perspective’s resilient strategy has delivered positive excess returns in different style-driven environments
Portfolio managers
Noriko Chen San Francisco 23 years at Capital
Barbara Burtin Los Angeles 13 years at Capital
Rob Lovelace Los Angeles 36 years at Capital
Andraz Razen London 17 years at Capital
Jody Jonsson Los Angeles 31 years at Capital
Brady Enright San Francisco 25 years at Capital
Patrice Collette Singapore 22 years at Capital
Steve Watson Hong Kong 32 years at Capital
Research portfolio Global team
Jonathan Knowles Singapore 30 years at Capital
1. Date shown is when current position was initiated in Capital Group New Perspective strategy. 2. Market cap as at month-end after first purchase. Source: Capital Group
Data as at 31 March 2022. Returns in US$ terms. 1. MSCI All Country World Index (ACWI) (with net dividends reinvested) from 30 September 2011; previously MSCI World (with net dividends reinvested). Source: MSCI 2. Relative returns calculated geometrically for the Capital Group New Perspective Composite, compared with the index in footnote 1. Net of management fees and expenses for a representative Luxembourg fund share class (Z), applying the maximum Total Expense Ratio (TER). Please visit capitalgroup.com for further details. Annualised returns for periods of more than 12 months. 3. Defined as at least a 20% cumulative drop in market value.
As at 31 March 2022. Returns in US$ terms. 1. Relative return (rebased to 100) of MSCI All Country Growth vs MSCI All Country Value (with net dividends reinvested) from 30 September 2011; previously MSCI World Growth vs MSCI World Value (with net dividends reinvested) in US$ terms. Shift in market type is defined as at least a 15% rise in relative terms either for Growth vs Value, or Value vs Growth. Data from 31 December 1974, from the launch of the MSCI Value and Growth indices. Source: MSCI 2. Relative returns calculated geometrically for the Capital Group New Perspective Composite, compared with MSCI All Country World Index (ACWI) (with net dividends reinvested) from 30 September 2011; previously MSCI World (with net dividends reinvested). Net of management fees and expenses for a representative Luxembourg fund share class (Z), applying the maximum Total Expense Ratio (TER). Please visit capitalgroup.com for further details. Sources: Capital Group, MSCI
First purchased
Market cap at fiirst purchase
Current market cap
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Change in market cap
Market cap at first purchase
Steven Smith, investment director
Steven Smith on an all-weather portfolio
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If we can find companies with those traits, then we can invest in them for a very long time because their potential earnings and growth runways can be very long
These measures are standard exclusions, and TwentyFour argues that they make little difference to portfolio returns, based on a five-year simulated test. However, subsequent stages of the company’s ESG process are more complex and, ultimately, designed to be additive to sustainable goals.
* Integrated approach is based on the Strategic Income Strategy representative portfolio. The companies identified above do not represent all securities held and should not be seen as investment advice or a personal recommendation to hold the same or similar. No assumption should be made as to the profitability or performance of any company identified or security associated with them. The positions detailed above are as at the date below and may or may not represent a position held at any other point. Source: TwentyFour. April 2021
Steven Smith outlines the strategy’s commitment to a long-term view and how its ‘multiple manager system’ brings valuable cognitive diversity
Market cycles | Fund performance | Asset selection Portfolio construction | Measuring sustainability
FUND SNAPSHOT
How the TwentyFour Sustainable Multi Sector Credit Fund is designed to meet the challenges of a post-pandemic, sustainability-focused market.
The extraordinary events of the last year have left capital markets in a highly uncertain state. At the same time, the rising importance of sustainability for institutional investors has added a further layer of challenge and complexity to risk management and asset selection.
TwentyFour believes its Sustainable Multi Sector Credit Fund is well-placed to meet these challenges and help institutions match the expectations of their customers and beneficiaries.
Why Sustainable Multi Sector Credit?
For the firm’s Sustainable Multi Sector Credit Fund the process starts with a negative screen, which removes from consideration investments in countries deemed to have poor ESG records. It also screens out investments in ‘sin’ industries: tobacco manufacturers, the arms industry, alcohol producers, carbon intensive industries, and gambling companies, for example
Delivering sustainable investments
There are a number of distinguishing features of the New Perspective strategy. The first is its track record, with consistent excess returns across a variety of different market environments and conditions. The portfolio also has a history of identifying and investing early in future champions before they become industry-leading companies and household names.
For example, the portfolio has held Google since its IPO in 2004, and we’ve owned TSMC – today the world’s leading independent semi-conductor manufacturer – since 1999.
We're not just investing in the big, well-known, large-cap multinationals. We are investing across the market-cap spectrum. We hold close to 300 names and include small to medium-sized, fast-growing companies that are expanding beyond their domestic markets. They often have disruptive business models, innovative technology and large and expanding addressable markets.
If we can find companies with those traits, then we can invest in them for a very long time because their potential earnings and growth runways can be very long. We're not just investing in today's champions but trying to identify future ones across multiple geographies and industries.
“Another uncertainty is that the market is saying inflation is going to be a problem because of pent-up demand. But maybe that pent-up demand is not going to meet expectations because of the pandemic’s potential impact on the psychology of consumers. So, despite a high savings rate, which ordinarily would indicate a potential tsunami of purchasing power, it is possible an apparently elevated savings rate becomes the new norm.”
What characteristics do investee companies tend to share?
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What makes the strategy unique?
It is also in our DNA to take a long-term view and look beyond short-term noise, with the courage to maintain our convictions and investments through difficult times.
Do you see yourself as value or growth investors?
The New Perspective strategy is deliberately anchored around global multinationals and companies that are expanding successfully beyond their domestic markets and meaningfully growing their overseas revenues and assets. As such, New Perspective has performed in different value and growth style cycles.
The portfolio construction process deliberately blends a team of global equity portfolio managers that are very different and therefore complimentary. We aim to build a team that is diverse in many ways, including age, gender, backgrounds, views of the world, investment styles, as well as concentration, sector and company preferences. For example, while there are tech and internet companies among the top 20 holdings, there’s also the life insurance company AIA, a traditional pharma company in AstraZeneca, and Carrier Global, a heating, ventilation and air conditioning company. There's a really eclectic mix of companies by geography, sector and type of style of investment.
What sectors of the global economy is the portfolio particularly exposed to?
Portfolio managers of the strategy have been investing in digital transformation and disruption for some time. There are also exciting transformational health care companies in the portfolio. Infrastructure is another significant sector, with holdings in companies that benefit from the next generation of infrastructure, including smart industrial companies and organisations exposed to vehicle electrification or 5G enablers. We're investing in the rise of the mass-affluent emerging market consumer, powerful demographic trends, sustainability, resource stewardship, energy transition, renewables, nutrition and wellness.
We are now thoughtfully analysing the potential implications of sustainably higher inflation, rising interest rates and slower economic growth on the long-term equity market leadership. Some of the companies we are investing in or potentially taking action with are very different companies to what the strategy has owned in previous years.
What is your ‘multiple manager system’, and what does it bring to the strategy’s performance?
The 10th component of the investment group – around 20% of the portfolio – is the research portfolio. That part of New Perspective is managed by our in-house investment analysts who are investing in the highest conviction holdings from the sector or sub-sector that they are responsible for. Like our portfolio managers, their remuneration is heavily influenced by investment results over one-, three-, five- and eight-year periods. Increasing weight is placed on each successive measurement period to encourage a long-term investment approach.
We want a series of highly different portfolios with different perspectives that have different return profiles. That is how a 300-stock portfolio has added such good levels of excess return over the longer term across a variety of market environments. We want our portfolio manager and analyst teams to be diverse - by age, by gender, by ethnicity, background and location. We want them to be different in terms of their views of the world, their investment styles, their investment biases. We want their individual portfolios to be different by number and concentration of holdings. It is this cognitive diversity that brings something truly unique.
Insights from the team
Select an image to read quote
Jody Jonsson on portfolio composition:
Steve Watson on being a contrarian investor:
Noriko Chen on the energy transition:
Jonathan Knowles on defensive tech stocks:
Rob Lovelace on China:
“I like to describe New Perspective strategy as a portfolio of global champions. Typically they have globally diversified customer bases, global supply chains, and they're robust, enduring companies with the potential to offer resilience and growth”
“Friends and colleagues sometimes say, ‘Steve is the kind of guy who runs into burning buildings.’ I find that a bit extreme, but it’s true that I am a contrarian investor at heart. “As long as I’ve been in this business, I have believed that the market swings from excessive enthusiasm to extreme pessimism. An investor with a reasonable degree of objectivity can benefit from selling the former and buying the latter.”
“Some traditional utilities are reaching an inflection point where they are starting to be recognised more as growth companies rather than just staid, old-economy power generators and grid operators. There are strong tailwinds that could drive growth for years.”
“I would argue that a company like Google parent Alphabet has some defensive characteristics, based on its cash flow and dominant position in the internet search market. “These are growth-oriented companies by most measures, but they may still hold up well in a sustained downturn based on their robust earnings potential, ability to innovate and relatively attractive valuations.”
“The key issue right now is — and this oddly came as a surprise to some investors — China is a socialist country. During the past year, the government has reasserted control over a number of industries, and that has resulted in steep valuation declines for many of the affected companies. “That’s been disappointing to some, but it doesn’t mean you shouldn’t invest in China. This is a fast-growing economy with a lot of innovation, especially in the technology and health care sectors.”
We have the courage to maintain our convictions and investments through difficult times
New quote to come
Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates. This information has been provided solely for informational purposes and is not an offer, or solicitation of an offer, or a recommendation to buy or sell any security or instrument listed herein.
SM
At the heart of our investment process or our portfolio construction process is the multiple portfolio manager system known as The Capital System . New Perspective's assets are split between nine different global equity portfolio managers. Each independently constructs their own sleeve or sub-portfolio based on their highest conviction investments.
Trustees want to make sure that ESG is an intrinsic part of our process as a manager – and that is something we have done for a long time. They ask for a lot and there is demand, not just for sustainable products, but to make sure that in our portfolios we are doing the right thing, engaging with issuers on the environmental and social implications of their business practices.
What are the considerations for pension schemes looking at ESG, and how are trustees addressing this issue?
