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Capital Group: Multimanager System the 'Best of Both Worlds'

Alec Lucas, Ph.D.

Alec Lucas: Hi, I'm Alec Lucas, a senior analyst with Morningstar's manager research team. I'm here with Brad Vogt of Capital Group's American Funds. He is a longtime portfolio manager, a member of the firm's management team and also, a member of the portfolio oversight committee, the role we'll be focusing on today.

Brad, thanks for joining us.

Brad Vogt: Thanks, Alec. Good to be here.

Lucas: We've talked about diversification. You are on a panel at our conference this year talking about the future of diversification, the importance of diversification. Capital Group, specifically with the multimanager system, has a very strong system when it comes to diversification. Could you talk about the multimanager system and how that fosters diversification?

Vogt: Happy to. We've had a system for decades that is really quite different than many of our competitors. It starts at the core with research. Our view of an analyst is not just a researcher but an investor, a true investment leader. Typically, 20% or more of every one of our funds is managed directly by the analysts. They end up becoming a lead investor, they stay in the role longer because they appear with the portfolio managers and they get more experienced. We think we have better research outcomes because of that career analyst role.

Then with the portfolio managers, rather than having one star manager who controls most of the fund or a committee that has to vote and get consensus, we have a series of individual managers who all sign up for the mission of the fund, but then they can each be very concentrated and have high conviction portfolios themselves. We put together a complementary group of managers that then the sum of those individuals creates a diversified portfolio. We think it's the best of both worlds. You have concentration and conviction at the PM level, but then balance and diversification for the whole fund. It also allows us to be modular and replicate the system over time because we can weave in portfolio managers who are younger, and we don't have the generational problems of the senior person leaving and starting over.

Lucas: Yeah, less succession risk. You have been with the firm 30 years. How long were you an analyst before you became a diversified portfolio manager?

Vogt: I was a full-time analyst covering the U.S. telecommunications, cable, satellite industry for about 17 years. As I like to say, I went through four CEOs of AT&T while I was the analyst. When you do that, you learn a lot. You make some mistakes, but you also get more perspective on companies, on the industry and hopefully, you make better decisions as you go on in time.

Since then for the last dozen or so years, I've been a portfolio manager. I've been able to work on a number of our funds and strategies. Today, my core focus is Capital Income Builder and American Mutual Fund as sort of dividend-oriented, more value, lower-volatility equities.

Lucas: Those funds play an important role in the American Funds' target-date series which you are the principal investment officer of. Could you talk about your role on that fund and the portfolio oversight committee and how it works at a fund-of-funds level?

Vogt: Sure. Similar to the way we manage our underlying funds, when we started out looking at fund-of-funds and target-date, we decided that we would put together not just a single asset allocation guru but a group of individuals who were experienced portfolio managers, both equity and fixed, leaders in the firm and have that firm be essentially the architecture committee for all of our fund-of-fund offerings--target-date retirement, our college 529 glide path, our portfolio series and retirement income series. We as a group set the asset allocation guidelines and then populate individual funds in each of those solutions, whether it would be each vintage of target-date or portfolio series.

Within those solutions we have flexible funds, funds that are either global or multi-asset that can be the swing voter and create the tactical distinction in asset allocation. The committee sets an overall construct of a glide path or a level of flex. And then day-to-day the portfolio managers in the global funds and the multi-asset funds are the swing voters that act on the ground and create that tactical element.

Each of the platforms that we oversee has a principal investment officer. I serve in that role for the retirement glide path. That means that I'm the person that reports to the independent board. I help direct the research around that glide path. But ultimately, the committee is responsible for any major decision.

Lucas: One of the things that differentiates you from your peers is that as an investor who sits on the oversight committee, you are both a member of the oversight committee and an investor in your underlying funds?

Vogt: That's right. And we think that's a good thing. We think that the committee being populated by portfolio managers who know the funds intimately is better than folks that don't know the funds as intimately. None of us are compensated by our fund being in the glide path or not. None of our portfolio manager compensation is based on the size of the assets of your fund or that you are responsible for. All of us want the glide path and the other fund-of-fund solutions to be the best they can be. It helps that we know the underlying funds. There are two portfolio managers on the committee who are fixed-income focused, five of us who are more equity focused. But all five of those have experience in multi-asset funds. Think about our balance funds or our equity income funds.

Lucas: One of the things that's distinctive of American Funds relative to peers at least is they tend to have--pretty hefty cash stakes are not uncommon. It's also not uncommon to have relatively light weighting in small- and mid-cap stocks. At the individual fund level, there's things that you can do in combining that with other funds from maybe other firms that can mitigate that. But when you collect them all together, as you do in the American Funds target-date series, how do you address that, putting your committee hat on?

Vogt: It's a good question. We like the flex that our portfolio managers have on many dimensions. On holding cash if they think the markets are overvalued. We think that's a good thing and we are seeing that in some cases in some of our funds, particularly in the area, U.S. growth-oriented funds. Cash levels are not radically high, but they are a bit higher than they were a few years back. We also like other elements of flex, whether it'd be market cap, industry. What we really try and do is when we design the glide path or a fund-of-funds solution, try and combine funds that we think over time will have a logical mix in a certain asset class and then let them flex.

When we designed the target-date glide path 10 years ago, we felt that a range of somewhere between 10% and 20% in small- and mid-cap was about a logical range and that it would flex within that. Today, I think, we are around 12% or 13% in small and mid, which is lower than some of our peers, but that's because our portfolio managers who have flexibility have made collectively a judgement that they see value in big-cap companies, and you think of some of the killer platform companies that we've seen that have been enormous winners in this market. I am sure that over time that will flex back and forth. It's the committee's job to watch that interaction and if we ever felt that we needed more small- and mid-cap structurally, then we could easily edit the fund weightings to do that. Today, we are comfortable.

Lucas: As you think about the glide path and the potential to make changes--and maybe it's changed in some important respect since you originally set it up, that would be interesting to hear about--but can you just talk about the firm's ability, one of the hallmarks of American Funds is that its investors make fundamental-based qualitative investment decisions. That's one of the strengths of the firm. Can you talk about that strength in the anticipation of perhaps choppy markets to come and how that might impact decisions made for the glide path?

Vogt: I will start there. We think active management has a huge long-term advantage if it's done well, and the advantage is, you are not simply buying every company in the index. You are doing your own proprietary qualitative work. We have analysts on the ground worldwide. Arguably, the largest and deepest and most experienced analytical team in the industry. They are also not just researchers; they are investors. Those analysts are meeting with suppliers, meeting with competitors, meeting with the company managements, getting to know the strengths and weaknesses. That should lead to better decisions over time.

We have a global cluster of analysts in every industry. We are fundamentally a global firm. We have senior people based in Asia, in Europe. The analysts in an industry interact together and have insights. Say, our tech team based in L.A. and San Francisco was just in Taiwan and Seoul and China visiting all of the Asian-based telecom and tech companies together, that interaction of our analyst globally has led to great insights and hopefully will lead to better results.

We think that fundamental nature of active management will prove out over time. It's been the case for us over many decades, and we expect it to be the case in the future.

Lucas: We will close on that note. Thank you very much for joining us for Morningstar's Manager Research. I'm Alec Lucas.