Since its founding in 1931, Capital Group has been singularly focused on delivering superior, consistent results for long-term investors using high-conviction ideas, rigorous research and individual accountability. Its multiple-manager system, The Capital SystemSM, has allowed it to navigate periods of economic and market uncertainty in an investment strategy that combines independent high-conviction decision-making with the diversity that comes from multiple perspectives.
The outcome of this approach is evident as the Capital Group Europe Equity strategy and Capital Group New Economy strategy added value for the group’s investors with results that were well ahead of the reference indices based on their respective award categories. Capital Group was awarded best performing European Equity (3 years) and best performing Global Equity (10 years) in Asia Asset Management’s (AAM) 2021 Best of the Best Awards.
Both strategies had a standout year in 2020. The Capital Group Europe Equity strategy generated gains of 14.5% before fees (in EUR terms) and 12.6% after fees (net of highest management fees), delivering excess returns of 17.8% and 16.0% respectively, the highest since 1999. However, the MSCI Europe Index (net dividends reinvested, in EUR terms) was in the red, registering a return of -3.3% in 2020.
Meanwhile, Capital Group New Economy strategy enjoyed a return of 34.5% before fees (in USD terms), more than double the MSCI All Country World Index’s (net dividends reinvested, in USD terms) return of 16.3%. Net of highest management fees, the strategy returned 32.5%.1
The company was also awarded in the category of best performing US Credit, Investment Grade (3 years). Capital Group’s US Corporate Bond strategy continued to add to its track record of delivering strong risk-adjusted results ahead of its reference index. In 2020, investment grade corporates climbed 9.9%, well above gains in most other parts of the US credit market;2 during the same period, the strategy returned 13.9% before fees (in USD terms) and 12.7% after fees (net of highest management fees).
Overcoming short-term uncertainty
Ada Zhang, managing director for institutional business at Capital Group Asia, believes that in the past year the uncertainty of the global economy has been overshadowed by the impact of the Covid-19 pandemic. While the pandemic will continue to create short-term uncertainty, any sustained economic rebound will be dependent on the trajectory of the virus, she says. However, built around the diverse perspectives of a global macro framework based on shared perspectives, Capital Group’s investment process remains unchanged.
For Zhang, fundamental, globally integrated research is crucial for identifying investment opportunities and risks. Specific to Europe, Capital Group has retained significant exposure in the aerospace and defence industries, particularly aircraft and aircraft equipment manufacturers. They also continue to include companies in the luxury goods market in their portfolios.
“Having a broad opportunity set allows us to identify fast-growing companies and opportunities as they develop. For example, our portfolio managers in the newly launched Capital Group European Opportunities Fund (LUX) invest across the market-cap spectrum, giving them the flexibility to participate in early-stage companies and opportunities as they evolve. We also believe that by investing in companies with robust business models, competitive moats and strong management teams, it is possible to capture long-term growth.”
The search for growth
On global equity, Zhang says that as economies put stay-at-home measures and travel restrictions in the rear-view mirror, in the short term we can expect to see a surge in consumption, likely to be reinforced by pent-up demand and high savings rates around the world. In the medium term she foresees a boost in infrastructure investment, especially green infrastructure projects. In addition, the continued trend for digitalisation and advances in technology such as AI and machine learning, autonomous vehicles and virtual reality, could result in major drivers of growth over time. She also sees secular growth in the healthcare and technology sectors based on the changing habits of consumers. These broad-based investment themes, she says, will continue to cross many sectors of the economy, from retailing and entertainment to advertising and payment processing. Meanwhile she also points to the importance of undertaking deep fundamental research in secular growth areas hit hard by the pandemic, such as the travel industry, where business travel may be slower to recover compared to the pent-up demand for tourism.
“Separating the long-term winners from the losers will be the priority for investors who value fundamental, bottom-up research and highly selective investing,” she tells AAM. “Our job is to identify the growing companies that have not only benefited from the pandemic, but those who also have the potential to continue solid growth in a post-pandemic world.”
Zhang observes that equity market valuations are likely to reflect both vaccine-related optimism and the unprecedented speed and scale of central bank balance sheet expansion and resulting liquidity. However, she also notes that the MSCI ACWI was trading at a 12-month forward price-to-earnings ratio of around 20x early this year, adding that this doesn’t seem extreme by historical standards, particularly considering that monetary and fiscal stimulus looks set to remain supportive, globally.
Similarly in emerging markets, Zhang predicts a number of positive tailwinds: “Emerging market valuations remain attractive given growth prospects; also strong economic recovery in China and continued stimulus in the US are positive for growth momentum. The Biden administration should be supportive for emerging markets, given the likely shift in US trade policies to a somewhat less confrontational stance. A weaker US dollar and rising commodity prices should provide a further tailwind, while low interest rates continue to support asset prices generally and mean investors may need to become more comfortable with higher price-earnings multiples.”
In essence, Zhang is positive that equity markets may move higher if investors flock to stocks in search of better returns than those offered by other asset classes.
US fixed income
In the current environment, the most important variables for the economic outlook are the virus itself and the vaccine, says Zhang.
“While vaccine approvals and early inoculation are encouraging, it would not be surprising to see some economic data weaken in the coming months,” explains Zhang. Nonetheless, the baseline expectation for annualised US GDP group for 2021 is 3%, with most growth coming in the second half of the year, according to Capital Group’s economic and research director, Darrell Spence.
And while Zhang notes that US Treasury yield have been under upward pressure from market expectation of significant fiscal stimulus in 2021, the argument against a move higher in yields is equally compelling in the short to medium term if the Fed chooses to keep rates on hold for a significant period of time whilst continuing quantitative easing to result in attractive yield levels on both outright and currency-hedged bases for non-USD based investors.
“The weaker US dollar narrative, based on the ‘vaccine reflation scenario’ underpinning a traditional global recovery story with higher commodity prices and a recovery in global trade and global capex, creates a tailwind for pro-cyclical emerging market currencies and the euro,” she explains. “In the near term, however, the scenario of a slower vaccine rollout globally, coupled with US fiscal reflation, may trigger a stronger US cyclical boom and actually be US dollar-positive. Currency is just one, albeit important, factor a global bond investor takes into consideration when making allocation decisions.”
Commenting on the opportunities now in the US fixed income market Zhang notes that at current credit spread levels, investment grade corporates are likely to have priced in much if not all the good news around a positive economic outlook, with investors receiving little compensation for any potential risks.
“This is a time to be patient; investors may find more attractive entry points throughout 2021. On a long-term, secular basis, prudently managed investment grade corporate bond funds can play an important role in portfolios. Within high yield, B-rated and CCC-rated bonds may outpace their BB-rated counterparts in 2021, given the current dispersion of credit spreads. By industry, energy and transportation could fare relatively well, if the vaccination rollout progresses smoothly and economic conditions improve in line with what’s widely anticipated.”
Looking at emerging market (EM) debt, she also sees pockets of value in both US dollar and local currency debt. And while sovereign bonds continue to provide the bulk of the investment opportunity, Zhang also finds value in select corporate bonds.
“While recognising that investors may have specific preferences for local currency or dollar-denominated debt, we see the greatest value in an actively managed, blended EM debt strategy. We also understand that for investment grade bond investing, assessing the ability and willingness of companies to avoid significant downgrades is vital and there is no better way of doing this than by maintaining close relationships with management teams. Such continuity is crucial to any long-term perspective, and Capital Group has the benefit of longevity when it comes to following companies and industries.”
1 Strategy returns are asset-weighted based on initial weights and monthly returns. Net of management fees and expenses for a representative Luxembourg fund share class (B), applying the maximum Total Expense Ratio. Please visit capitalgroup.com for further details. The excess return is calculated arithmetically. Source: Capital Group
2 Based on the Bloomberg Barclays US Corporate Investment Grade Index. Source: Bloomberg Barclays