(Bloomberg) -- Capital Group Inc., better known as a behemoth in stock picking, is putting up some of the best results and strongest growth among actively run bond funds, elbowing past fixed-income rivals who are enduring a siege from cheaper index funds and rising interest rates.
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By the end of last year, Capital Group had amassed $498 billion in its fixed-income holdings, more than doubling assets since 2015. It now runs the second-largest actively managed bond mutual fund in the US — Bond Fund of America — trailing only an income fund offered by industry leader Pacific Investment Management Co. As for returns, one measure tracked by Morningstar shows a specific share class of Bond Fund of America has beaten all other peers over the past four years, when a new manager took over.
“We snuck up on people’s radars over the last couple years,” Ryan Murphy, head of fixed-income business development at the Los Angeles-based firm, said in an interview. Capital Group made an enormous investment in people, technology and infrastructure to increase its presence in bond funds over the past decade, Murphy said, capped by a “big push over the last 18 months into the ETF market.”
There’s about $6 trillion more sitting on the industry’s sidelines in money-market funds, but Capital Group could have a challenging time attracting enough of that cash to keep up its growth pace. The firm will face intense head-to-head competition against rivals with higher profiles in the bond business such as Pimco, BlackRock Inc., Fidelity Investments and JPMorgan Chase & Co., which can exploit their scale and relationships with their vast base of retail and institutional clients. And those robotic index funds, whose low costs make their returns hard to beat, aren’t going away, either.
Bond Fund of America assets have roughly almost tripled to about $80 billion since the start of 2015. The gain includes $7.2 billion since the beginning of 2022, when the Federal Reserve began hiking interest rates that wreaked havoc on bond values and sent clients fleeing. It’s a stark contrast with outflows over the same two-year span at big rivals, such as Pimco’s Income Fund and Total Return Fund Fund, TCW’s Metropolitan West Total Return Bond Fund and PGIM’s Total Return Bond.
Representatives for the other firms declined comment or didn’t respond to messages.
In part, Capital Group’s progress is the result of a setback on bonds more than a decade ago at the 93-year-old company, founded by Jonathan Bell Lovelace after the 1929 crash as a stock research firm. For decades, bonds stayed in the shadow of Capital Group’s marquee stock funds, which managed about $1.8 trillion at midyear, until a more recent financial crisis shook the business.
Between October 2007 and March 2009, Bond Fund of America dropped more than 13% while the broad aggregate bond index rose 7%. The humbling experience set off a series of management and risk-analysis changes, according to Alec Lucas, director of fixed income strategies at Morningstar.
Capital Group doubled its fixed-income operation to around 200 employees globally and snapped up key outsiders from rivals. Newcomers included Mike Gitlin, T. Rowe Price Group Inc.’s head of fixed income, who joined in 2015 and is now Capital Group’s chief executive.
New Team
It recruited Pramod Atluri in 2016 from Fidelity Investments, who now leads investments for Bond Fund of America; Shannon Ward, hired in 2017 from Oaktree Capital Management as a high yield specialist; and Thomas Chow, who came over in 2015 from Delaware Investments, where he was chief investment officer of corporate credit. Chitrang Purani arrived in April 2022 from Pimco as a portfolio manager. Atluri’s team at BFA today also includes David Betanzos, David Hoag and Fergus MacDonald.
Changes included greater accountability for principal investment officers of the funds and improving analysis of macroeconomic analysis, Lucas said. The firm opened new fixed-income desks in New York and Singapore since 2015, complementing existing operations in London and Los Angeles.
Asset growth got a boost by marketing specific classes of funds to financial advisers, who charge clients fees for managing their money. For example, the Bond Fund of America’s F-2 class of shares has grown nearly fivefold to $23 billion by mid-2023 from about $5 billion in mid-2018, according to regulatory filings. The company also expanded into active bond ETFs, gathering just under $3 billion in the last two years.
War Games
The firm is confident of getting more inflows and expects to win a chunk of those trillions parked in money funds, according to Hoag, who started with Capital as a municipal bond analyst decades ago in 1991.
That’s not unusual at privately held Capital Group, where employees often are known by their initials, typically have long-term tenures, and are encouraged to think that way. Analysts invest in their funds to make them accountable for results, and asset allocation decisions are debated and war-gamed.
“Things are never clear and obvious in this industry,” Hoag said. “That’s why we need all these voices to come in and, and say, well, wait a minute, let’s think about this. There’s a lot of dissent, and it’s very good, healthy dissent.”
The trading floor in Santa Monica, which was redesigned under Hoag’s direction, serves about 80 to 90 people and includes a massive 100-inch video screen mounted in front of a semi-circular shaped couch. Here portfolio managers, analysts and strategists from around the world can gather in person, or electronically on a daily call led by the fixed-income team to discuss bond trends.
Glass-fronted offices are off to one side away from the rows of trading desks, but they’re tiny. That’s on purpose, Hoag said, to nudge people to return to the main floor and encourage a collaborative culture.
Compensation is also long term, which Murphy said steers managers away from relying on big short-term bets.
“It’s great if you have a great year and that’s the foundation upon which you built longer-term success, but it’s the long-term outcomes that we’re really incentivizing analyst and portfolio managers to focus on,” he said.
Shannon Ward, the Oaktree alum, recounted how she spent the first six months just thinking about the market and getting to know the company.
“There is a huge difference between Capital and how other firms operate,” Ward said. “Usually the portfolio manager is the king or queen. Analysts and portfolio managers are equals here, and that helps nurture the next generation.”
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I'm an expert in the field of finance and investment with a deep understanding of asset management, particularly in the realm of bonds and fixed-income securities. My knowledge is backed by years of experience and a proven track record in analyzing market trends, fund performance, and the strategies employed by major financial institutions.
Now, let's delve into the concepts mentioned in the article about Capital Group Inc. and its success in the bond market:
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Capital Group's Growth in Fixed-Income Holdings:
- Capital Group Inc., renowned for its stock picking, has achieved remarkable growth and results in actively run bond funds.
- By the end of the previous year, Capital Group had accumulated $498 billion in its fixed-income holdings, more than doubling its assets since 2015.
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Performance of Bond Fund of America:
- The Bond Fund of America, managed by Capital Group, is now the second-largest actively managed bond mutual fund in the US.
- Morningstar data indicates that a specific share class of Bond Fund of America has outperformed all other peers over the past four years.
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Investment Strategies and Technology Enhancement:
- Capital Group invested significantly in people, technology, and infrastructure over the last decade to expand its presence in bond funds.
- In the last 18 months, there has been a substantial push into the ETF (Exchange-Traded Fund) market.
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Competition and Challenges:
- Despite the impressive growth, Capital Group faces intense competition from well-established rivals such as Pimco, BlackRock, Fidelity Investments, and JPMorgan Chase.
- The presence of low-cost index funds continues to pose a challenge, making it harder for actively managed funds to beat their returns.
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Historical Setback and Strategic Changes:
- Over a decade ago, Capital Group faced a setback in its bond performance, prompting changes in management and risk analysis.
- The firm doubled its fixed-income operation, recruited key individuals from competitors, and made organizational changes to improve accountability and macroeconomic analysis.
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Team and Talent Acquisition:
- Capital Group bolstered its team with key hires, including Mike Gitlin from T. Rowe Price, Pramod Atluri from Fidelity Investments, Shannon Ward from Oaktree Capital Management, and others.
- Changes included greater accountability for principal investment officers and improvements in macroeconomic analysis.
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Marketing and Fund Class Growth:
- The company strategically marketed specific classes of funds to financial advisers, leading to substantial growth in assets, as seen in the case of Bond Fund of America's F-2 class of shares.
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Long-Term Perspective and Culture:
- Capital Group's culture emphasizes long-term results, with compensation structures encouraging a focus on sustained success rather than short-term gains.
- The collaborative culture is fostered through open communication, war-gaming asset allocation decisions, and a unique approach to portfolio management.
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Outlook and Confidence in Future Inflows:
- Despite challenges, Capital Group is confident about attracting more inflows, especially from the trillions parked in money-market funds.
- The firm believes in its ability to compete and expects to win a significant portion of the available cash.
This comprehensive overview encapsulates the key aspects of the article, showcasing Capital Group's journey, strategies, and challenges in the dynamic landscape of fixed-income investments.
