Sat, 30 Jan 2016
A multimanager system focused on finding companies poised to benefit from changing global trade patterns has led to consistent outperformance for Morningstar's International-Stock Fund Manager of the Year.
Alec Lucas: Hi, I'm Alec Lucas, an analyst with Morningstar's manager-research team, and I'm joined today by David Polak of Capital Group, the parent to American Funds. He's here today to talk about American Funds New Perspective (ANWPX), which won the Morningstar International-Stock Fund Manager of the Year award for 2015.
David, congratulations to you and to the team of New Perspective.
David Polak: Thank you very much, Alec.
Lucas: So, Rob Lovelace and Jody Jonsson give leadership to the seven-person team, but each manager is free to invest according to his or her convictions. Could you briefly introduce us to each of the managers on the fund and talk about how the team works together?
Polak: Yes. The seven managers really bring different perspectives to the fund and its objectives. They are in different locations. We have two in San Francisco, two in Los Angeles, two in Asia, and one in Europe. They have different tenure and a different investment background that means that they look at the world differently.
Rob and Jody, you've mentioned, are both in Los Angeles. Brady Enright and Jonathan Knowles--one in San Francisco, one in Singapore. They also work on our SMALLCAP World Fund (SMCWX), and that's important because they see a lot of the emerging multinationals of the future coming out of that fund and some of those make their way into New Perspective. Steve Watson is in Hong Kong. He has a background in dividend investing, so he brings that perspective, even though the fund does not have an income objective. Then you have Isabelle de Wismes, a former banks analyst based in London. And then finally, Noriko Chen in San Francisco has an Asian background.
So, from those little brief portraits, you can see, hopefully, that they all have very different backgrounds, and they work in conjunction with the research analysts who are also investors in the fund. They are responsible for about one fifth of the assets, and their coverage is based on sectors.
Lucas: Since the fund's 1973 inception, it's been focused on firms benefiting from changing global trade patterns; but in October 2011, its benchmark changed. Could you talk about the fund's mandate and what led to that benchmark change in October 2011?
Polak: Yes, absolutely right. The objective of the fund is to find companies that have a substantial part of their business outside of their home market. And the thinking was--and is--that those companies have terrific runways of growth but they also have diversified sources of growth. So, we felt that they would provide good investment returns--and stable investment returns.
And the fund, as you point out, has looked at investing around the world since very soon after its inception. In 2011-12, we recognized that the world had changed somewhat. There were a lot of companies that were domiciled in what we call emerging-markets places like Korea, Taiwan, Brazil, and China that are doing a significant part of their business outside of their home market. When that group of companies became large enough, we felt that it was appropriate to adjust the opportunity set or the benchmark to that broader opportunity set--the MSCI All Country World Small Index, including those emerging-market companies.
Lucas: Of course, emerging markets had a tough time in 2015, and the fund benefited by staying away from them. It was able to finish in the top decile of its Morningstar Category in a very challenging environment. It has a very superior long-term record as well. What have been the keys to the fund's long-term success as well as its top-decile finish in 2015?
Polak: I'll take that question in two parts--the longer-term and the shorter-term piece. Over the long term, the fund has been very focused on looking at the world from the bottom up, building the portfolio one stock at a time. Looking at companies that have this runway for growth, there is something about companies that are expanding beyond their home market that suggests that the goods and services are attractive to more than just one marketplace. Focusing on those companies and having the flexibility to move around sectors has been one of the key drivers of the long-term returns. Looking at the R6 share class, lifetime returns were around 12.6% against benchmark, which has been around 8.25%. So, we've had significant excess returns--the majority of which have been driven by stock-picking.
During the course of 2015, that played out again. It was mainly stock-picking--a focus on the companies that we believe are on the right side of some of these significant changes that are going on around the world. We're seeing business models radically shifting--some profound changes going on in the way industries and companies are organized. So, for instance, a number of the drivers were from the "Internet of Things": companies like Priceline (PCLN); companies like Amazon (AMZN); companies like Naspers (NPSNY) in South Africa that has a significant holding in Tencent (TCEHY), an Internet company in China; semiconductor and component companies that feed the mobility of things; some financial institutions that have done well, being on the right side of regulatory change; and then healthcare, lots of immunotherapy and other science-based companies.
These are where some of the stock-picking has come through, but we've also been able to avoid some of the companies that are on the wrong side of these changes. We've had very little in energy and in mining, really, for the last five years. So, that really helped in 2015. It was a combination of finding a number of companies that worked well, that had attractive long-term growth profiles, but also avoiding some of the worst companies during the course of that year.
Lucas: And as you look forward to 2016, some of the themes that were prominent this past year in 2015 look poised to continue--divergent central-bank monetary policies, depressed commodity prices (especially oil), volatility, and so forth. What are the managers thinking and how are they trying to respond to what could be a difficult year going forward?
Polak: Well, as ever, there's always a debate about what has worked and how long it can continue, and what has not worked and whether it's time to really take a hard look at the areas that haven't worked. Taking both of those parts, the things that have worked have largely been companies with, let's say, secular-growth characteristics that we think have long runways for growth. And in a low-interest-rate environment, the discount-rate mechanism works so that you can buy future profits at a reasonable price today. The key, there, is valuation. To what extent has the market begun to discount a really long way into the future? So, we spend a lot of time thinking about some of these companies. Great secular long-term growth, but is the market a little overfocused there?
On the other side, we've seen oil prices come down from more than $100 a barrel to less than $30. That is a significant shift; it seems to be mainly supply-led. So, what is going to change over the long term--or the medium term, even--those supply characteristics? And we're having a pretty vigorous debate about that at the moment. We felt, when oil prices started to come under pressure back in 2014, that we had time on our side. I think that probably still is the prevailing wisdom within the group--and remember I'm giving an aggregated view of lots of different opinions at Capital. But here we are, let's say, 15 or 16 months into this slide; the debate is as vigorous as it ever was.
Lucas: David, many thanks for your thoughts today. Thank you for joining us. And congrats, again, for winning the 2015 Morningstar International-Stock Fund Manager of the Year award.
Polak: Alec, thank you very much.
Lucas: For Morningstar, I'm Alec Lucas.