Best Fixed Income Fund House - Capital Group
M: Morningstar C: Capital Group
M: What is your outlook for 2019 specific to the markets you cover, and how are you positioned to take advantage of opportunities and/or mitigate potential risks?
C: Markets episodically experience periods of volatility, and we expect 2019 will indeed be incrementally more volatile than the past year. We are cognisant that global economic growth is slowing, but do not expect a global recession in 2019. The US economy is exhibiting various late-cycle characteristics, while China and Europe are also slowing. Excessive corporate debt, especially among some US and Chinese firms, as well as tighter financial market conditions associated with a strong US dollar, clearly have the potential to weigh on global markets. Political uncertainties among many of the world’s leading economies, as well as the potential negative impact associated with trade tariffs and rising protectionism, are also credible headwinds.
In the US, macroeconomic and financial imbalances have been slow to emerge and we are not expecting a recession in 2019. Another significant difference in the environment today, compared to 2018, is that the US Federal Reserve (Fed)’s normalisation of US monetary policy may have ended, or taken a pause at the very least. It is possible to argue that there is now a greater probability of an interest rate cut (rather than a rate rise) by the Fed between now and the end of 2020.
In credit markets, spreads – the gap between the yield on credit and US Treasuries – have remained narrow by historical standards. For bond investors, that means the compensation for taking on credit risk is relatively low, and the upside from here could be quite limited. Looking ahead, credit spreads could widen in 2019 as investors demand additional yield as compensation for credit risk. However, with significant income generated in high yield, the market can absorb yield increases and still generate positive returns, just perhaps in a more muted manner. We have a high degree of confidence in our ability to pick credits due to our experienced team of analysts.
M: What do you think are the success factors in your corporate culture than enable your firm to consistently deliver for investors?
C: At the heart of Capital Group’s culture is a set of values that shapes our decision-making and the way we interact with investors and one another. Collaboration, rigorous research and long-term focus are some of our core values that help us pursue superior long-term results for our investors.
Our collaborative culture is fundamental to our investment process, a multi-manager system designed to enable individual investment professionals to act on their highest convictions, while helping to limit the risk associated with isolated decision-making. We go to great lengths to foster open discussion and debate, so that portfolio managers and investment analysts can share their best ideas, have those ideas challenged internally, and challenge the ideas of others.
Intensive global research is part of our investment philosophy. We seek long-term value in fixed income by devoting significant resources to internally generated, fundamental research. Our fixed income analysts evaluate companies’ management structures, financial strength, resources, products, services, business climate, future earnings and dividends.
Our on-the-ground research (company visits, discussions with suppliers, interviews with federal agency staff, and visits with central bank staff members, politicians, national bankers, regulators and industry leaders) is combined with comprehensive macro analysis, with our equity and fixed income analysts working together to pool resources. Such a process has the potential to deliver compelling investment ideas and gives portfolio managers a broader and deeper understanding of risk.
Our ownership structure, combined with our active, long-term approach to monitoring and managing results, provides significant incentive for investment professionals to contribute at a consistently high level over many years. As a privately held firm, we want to provide for the smooth transition of ownership to the emerging leaders and successful investment professionals within the organisation. This ensures stability and helps to maintain our long-term focus. This is core to who we are and essential to our ability to generate superior, long-term results for our clients.
M: Can you share some of your future business plans with us, such as the launch of new products?
C: In Asia, we are selectively building out our fixed income fund range as part of our multi-year, strategic plan to give clients based in Asia access to the best of Capital Group’s fixed income strategies.
Presently, we’re accelerating the engagement efforts with our key strategic partners for fixed income strategies that we think will benefit investors in the current market environment. These include Capital Group Global High Income Opportunities (LUX) and Capital Group Global Corporate Bond Fund (LUX).
Capital Group Global High Income Opportunities (LUX), which celebrates its 20th anniversary in 2019, was one of our earliest funds to be offered in the Asian region. The fund aims to provide investors with a high income yield, through investing in a broad range of well-researched securities sourced from the higher-yielding corporate and emerging market government bond universes. Capital Group Global Corporate Bond Fund (LUX), on the other hand, provides exposure to investment-grade corporate bonds, adopting a research-driven, well-diversified and quality-orientated approach to corporate bond investing.
M: How has the firm been responding to industry fee pressure?
C: Capital Group has a long standing, demonstrated commitment to low investment management fees which we believe is a critical component in achieving investor outcomes over the long term. As a firm, we manage fees through a dedicated team who look at positioning for our strategies and vehicles globally.
For Capital Group, and similar to other active managers, the pressure on management fees is a constant dialogue. This fee pressure can be even more acute for fixed income where a basis point of fee difference could make a significant difference to investor outcomes.
As we distribute our funds in Asia, we are operating within an industry that continues to favour bundled management and distribution fees.
For that reason, we review our management fee levels, and importantly all other expenses for our funds, on an ongoing basis to challenge ourselves to achieve a lower total expense ratio (total fees and expenses) and a fee structure that is tailored to the investor type and distribution channel.
In 2018 we reduced the operating expense cap on our distribution fee share classes because this is one of the ways that we can help control the fee to the end investor. We have also taken steps to address other costs that could result in lower fees for the end investor, for example, reducing transaction costs by leveraging the scale of our global trading network and volumes.
Finally we work closely with our distribution partners to continue to challenge management fee levels and structures as regulations and the regional industry continue to evolve.
M: Are there plans to further strengthen your investment team? In which areas?
C: Over the years, we’ve added credit analysts and fixed income portfolio managers to enhance our research capabilities across the world. Additionally, we’ve established trading desks in Singapore and New York to complement our existing ones in London and Los Angeles. Each of our traders specialises in a given asset class and a given sector. Compared to generalists, we believe that dedicated sector specialists tend to obtain better liquidity in secondary markets.
Within the Asia region, we’ve strengthened our fixed income presence with the appointment of James Blair as Head of Fixed Income Investment Services Asia Pacific in early 2018. James’ appointment complements Capital Group’s strategy in the Asia Pacific to expand our investment offerings to investors. James is responsible for managing fixed income distribution within the Asia Pacific region, providing strategic advice on asset allocation to clients and implementing fixed income offerings to investors in the region.
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