Capital Performance : An Enviable L.A. Family of Funds Takes a Long View
For Wall Street, the 1990s are shaping up to be a time of dwindling opportunities, lost jobs and meager profits.
But the unfolding decade almost seems special-ordered for Los Angeles-based Capital Group, the Southland’s biggest private money manager:
* In a troubled investing environment that demands a long-term focus, Capital’s oldest stock and bond mutual funds boast historical track records that are among the industry’s best.
* While many firms are just now struggling with their baby boomer employees’ restless ambitions, for 30 years Capital has had an egalitarian management structure that stresses high individual achievement--and lets junior employees run their own shows.
* While financial services companies of all kinds are paying dearly for the excesses of the 1980s, Capital’s tortoise-like, conservative approach has left it in a powerful position to gain from competitors’ weaknesses.
Yet for Capital’s monolithic size--$55.8 billion under management, ranking it 16th largest of all U.S. money managers--the firm is a surprisingly quiet presence in Los Angeles. “We probably should be better known in our hometown,” admits Jon Lovelace, the 63-year-old vice chairman of the firm and by most accounts its spiritual leader.
One of Capital’s few highly visible executives in recent years has been Robert Kirby, chairman of the firm’s institutional investing arm, Capital Guardian Trust. A member of the so-called Brady Commission that studied the 1987 stock market crash, he became a vocal opponent of computerized program trading in the late 1980s. In general, however, Capital has rarely sought publicity. Yet its investment record has become the envy of many rivals.
“It’s a first-class operation,” says Budge Collins, head of Collins Associates, a Newport Beach firm that tracks investment firm performance. “They hire good people and they keep them. They have very low turnover.”
“It’s an organization of which I’ve never heard anything negative,” adds Michael Stolper, a San Diego pension consultant.
Both insiders and outsiders say much of the credit for Capital’s success goes to the self-effacing Lovelace, a Princeton economics graduate whose father founded Capital in the early 1930s.
Ironically, Lovelace also now represents one of Capital’s greatest challenges--that is, the challenge of doing without him as he nears retirement. Though Lovelace insists that Capital’s management depth is so great that his presence wouldn’t be missed, insiders say his departure would leave a void.
As the biggest stock mutual fund manager on the West Coast, Capital is the antithesis of its giant East Coast rival, Fidelity Investments.
Both firms began to make their names in the 1950s, and both have grown dramatically since. But Fidelity offers 124 mutual funds; Capital offers just 24. Fidelity aggressively jumps on new fund trends and is a magnet for “hot” money that jumps from investment to investment; Capital always chooses the slow road.
What’s more, Fidelity’s structure is based on what is sometimes called the “star system” of portfolio management, as personified by Peter Lynch, who ran the firm’s Magellan Fund in the 1980s. Each Fidelity fund has one manager ultimately calling the shots.
Capital’s approach is the polar opposite: All 24 funds are split among three to five money managers, each of whom is free to manage his or her slice without answering to one fund czar. In that way, no star system can develop because no single manager alone can make or break a fund.
The Capital system’s results:
* The firm’s three biggest stock funds far outgunned the average stock fund and the benchmark Standard & Poor’s 500-stock index in the 10 years ended Sept. 30. An investor who put $10,000 in Capital’s Investment Co. of America fund in 1980 would have $42,300 now. That same investment in the S&P; 500 would be worth $37,000.
* Capital’s success wasn’t just a phenomenon of the 1980s. Its funds, under the American Funds name, have produced strong returns since the 1950s. That record has landed the firm a long list of accolades--from Forbes magazine’s fund honor roll to the top spot in a 1990 report on the best fund families by fund tracker Kanon Bloch Carre.
On the surface, having three to five people separately managing chunks of a single fund--as bullishly or bearishly as each sees fit--might seem like an invitation to investment anarchy. But Capital has discovered that, regardless of short-term conflicts, the results over the long-term somehow come together.
The multiple-manager system was devised by Lovelace in 1958 as just a transitional idea after a fund’s manager moved up. But as he saw it working, Lovelace and his co-managers became convinced that the concept was a smarter approach than the one-manager system.
Another Lovelace innovation came in the mid-1960s, when Capital began including its research analysts in the multiple-manager system. Traditionally, analysts have simply fed ideas to fund managers to accept or reject.
“But some of our younger people in research asked, ‘Why not let us manage some of the money?’ ” Lovelace recalls. Nearly 30 years later, Capital says the analysts’ portfolios have frequently been the best-performing parts of its funds.
What’s perhaps most striking about Capital’s corporate culture is that it developed long before it was considered important to listen to--let alone implement--employees’ ideas. One of Lovelace’s guiding philosophies, he says, is to “to build responsibilities around our people, rather than just put names in organizational boxes.”
Capital employees say that isn’t just talk. Robert Neithart, a 25-year-old assistant economist at Capital, believes that the firm is “sort of a unique place to work. . . . One of the things they try to get across to younger folks here is that they really do take your opinion seriously. They don’t put an asterisk near your name and say, ‘He’s only been here for three years.’ ”
That egalitarianism isn’t without cost, though. Employees say the atmosphere is collegial, with a lot of give-and-take, hash-it-out discussions over investment strategies. But the firm wouldn’t win any awards in an expense-control contest, Capital’s executives admit. “Clearly the way we do a lot of things is not the most efficient way,” says David Fisher, executive vice president of Capital’s international operations.
However, because Capital is private--it’s owned by about 75 of its 1,200 employees--it faces none of the pressures of public firms to sacrifice long-term goals for short-term profit.
Why has Capital been able to thrive under that philosophy, while other money managers have been forced to live quarter to quarter? A key reason is that Capital essentially demands that its individual investors make a long-term commitment up front.
While Fidelity and other mutual fund companies sell their shares directly to the public, Capital funds are available only through brokers. To get into a Capital fund, an investor must get the pitch from a broker and pay a steep sales commission--4.75% to 5.75%.
That puts a damper on the idea of trading in and out of Capital funds and thus makes it easier for fund managers to devise long-term game plans with the money.
The possibility of selling the funds directly to the public is reviewed periodically, Lovelace says. “But when we review it, we always stay with where we are,” he says.
Why? “Our story is not simple,” Lovelace says. The concept of true long-term investing under Capital’s system takes patient explanation, which only a salesman can provide, he argues.
One of the key points the broker makes, Lovelace adds, is that Capital will never promise good short-term performance. What is promised is steady growth of a nest egg over time--which plays well with investors who are serious about retirement planning.
Of course, if Capital had failed to deliver over the past 30 years, its marketing would be to little avail. But because its investing record has been strong, the firm has created what could be a self-perpetuating cycle--it pulls in long-term money, delivers above-average long-term returns, and thereby attracts more long-term money.
Some rivals might argue that Capital’s reluctance to introduce new funds shows a narrowness in investing talent. Indeed, Capital is far better known as a stock manager than a bond manager, even though it runs one of the biggest bond funds (the $1.8-billion Bond Fund of America). In its rating report earlier this year, fund-tracker Kanon Bloch Carre gave Capital an “A” grade for its stock funds, but only an average collective grade for its bond funds, many of which still are relatively young.
Capital’s executives acknowledge that the firm is less recognized for its bond talents. But they make no apology for their patient approach toward new fund forays.
That stance is supported by the firm’s broker network, which views Capital’s conservatism as a major selling point with clients. “They could have brought out 20 new funds over the last few years, and every one would have been a winner,” says Mike Scafati, who heads mutual fund sales for brokerage A. G. Edwards & Sons in St. Louis. “But they pay attention to what’s best for the client.”
For all of the success that Capital has had with its broker network, the system also makes the firm vulnerable. Though Capital’s list of big institutional clients grew rapidly in the 1980s, its mutual fund business still accounts for 60% of assets, versus 40% for the institutional arm. So the small investor still is the firm’s bread and butter--which means that Capital depends on the brokers’ ability to get the funds’ message out. And as hard times hit the brokerage industry, and more brokers leave the business, Capital faces the prospect of reaching fewer investors.
James K. Dunton, executive vice president of Capital Research, admits that a constant challenge “is the maintenance of the sales force, which we don’t have any real control over. . . . We approach the needs of those (brokers) every day like it’s the most important thing we have to do--because it is.”
Yet even if the current brokerage shakeout is painful, this is hardly the first time Wall Street has gone through a purge. Capital’s sales network has survived other shakeouts, and the firm’s competitors have little doubt that it will survive this one too.
A much bigger question mark is how well Capital’s lauded management style will survive Lovelace’s eventual retirement.
Lovelace scoffs at such concerns, noting that he already spends much of his time away from the office, working from home in Santa Barbara. “Because of the nature of our structure, we’re not highly dependent on one person as some organizations are,” he says flatly.
Still, Capital’s senior managers don’t hide their reluctance to imagine Capital without Lovelace. “There is simply no way to replace a great leader like that,” Dunton says. “Many of the bold, decisive strokes of this organization have come right out of his head.”
* RELATED STORY: D4
QUIET GIANT
Capital Group now is the biggest private money manager in Southern California, and the 16th largest in the nation--ahead of such perhaps better-known names as Chase, CalPERS, Dreyfus and Travelers.
Assets under management at year-end except latest 1950: $40 billion 1990: $55.8 billion
Source: Capital Group
CALIFORNIA’S MONEY MONOLITHS
The biggest money managers based in California, according to the 1990 listing by Institutional Investor magazine.
Assets Firm Headquarters (billions) Wells Fargo San Francisco $92.8 Capital Group Los Angeles 51.8 Calif. Public Employees Sacramento 48.4 Franklin Group San Mateo 42.2 Pacific Financial Newport Beach 32.2 Security Pacific Los Angeles 28.1 First Interstate Los Angeles 25.7 Transamerica Investments Los Angeles 18.5 Calif. State Teachers Sacramento 17.1 Trust Co. of the West Los Angeles 17.0
Data as of Dec. 31, 1989 Source: Institutional Investor
HOW THE BILLIONS ARE SPREAD
Capital Group’s assets are split among three main subsidiaries:
* Capital Research & Management runs the American Funds group of mutual funds: 24 stock, bond and money-market funds with $32 billion in assets and more than 2 million shareholders. The funds are sold only through brokers and financial planners. Typical minimum investment: $1,000.
* Capital Guardian Trust manages $19 billion for more than 100 institutional clients, including L.A. County Employees Retirement, San Diego County Employees Retirement, Orange County Retirement, Notre Dame University, Sloan-Kettering Cancer Center, Screen Actors Guild, GM, Boeing, Comsat and PG&E.;
* Capital Group International manages $4.2 billion for foreign institutional clients. Foreign staff and research offices are located in Tokyo, Hong Kong, Geneva and London.
CAPITAL’S BIG FIVE STOCK FUNDS
Bigger has proved to be better at Capital Group: The largest American Funds have dramatically outperformed the market over the long term. How the firm’s five biggest stock funds have done versus the market and the average stock fund over three periods:
Assets Total investment return Fund/investment strategy (billions) 10 years 5 years 1 year Investment Co. of America $5.3 323% 103% -6.9% (growth and income) Washington Mutual Investors $4.9 346% 89% -13.5% (growth and income) American Mutual Fund $3.2 311% 86% -5.8% (growth and income) Growth Fund of America $1.8 256% 93% -16.0% (growth) AMCAP Fund $1.7 221% 75% -17.2% (growth) Average general stock fund 207% 65% -13.7% S&P; 500 stock index 270% 100% -9.2%
Performance data for periods ended Sept. 30.
Source: Lipper Analytical Services
