The Exchanges

Q Why don't we start with the capital story?

A We were founded coming out of the Great Depression, which is a really interesting founding of a company, especially one that's in financial services. So we were founded in 1931 with the view that we can manage people's money in a different and better way. There was a lot of speculation in the roaring twenties that led up to the Great Depression and the crash of the stock market. Our founder thought before the Great Depression that there were excesses, and this didn't make sense. He had written about it in the twenties, liquidated ahead of time, preserved his capital, and launched the entity afterwards. Even though he did that for the first twenty-ish years, it was largely a break-even business. He wasn't super successful in scaling assets in the thirties and forties, It was right after the Great Depression, which had a long tail to it. Part of the secret of the Capital's success is he kept the entity a hundred percent owned by himself until it was profitable. He didn't want anyone else to share in any of the losses that would come in any calendar year. Only after in the fifties Capital Group became profitable did he begin to sell little pieces to people at the company to share in the profitability as opposed to share in the losses.

AI assessment note: “We were founded coming out of the Great Depression, which is a really interesting founding”

Q So a lot's changed since then. There are a couple things that have been the same. The first in a world that's changing is the business is still private. How has that model impacted the investing?

A We talk about being private as a differentiator, but also a competitive advantage in our business of asset management, in that it's how we operate the enterprise and how we manage our client assets both. In the former, we don't have to worry about quarterly earnings. When other folks are pulling back and they're trying to meet a quarter We're not going to stop a technology project to meet a quarter. I've seen companies run like that in the past. That is not the best way to run a company if you don't have to. When other people are pulling back, we can lean in. We can gain mind share and market share, and we tend to do that. We tend to take the opportunity and market drawdowns to invest in the business. Why would you ever give up that advantage? Then the same token on the client side. My first podcast, I interviewed Rob Lovelace, who is the grandson of the founder. Jim Lovelace also works at Capital Group. He's also a grandson of the founder. Both of them have been at Capital for more than 40 years now. I interviewed Rob, and I said, what's your competitive edge? What makes you different? He said, time. One word, time. And he's measured on his eight-year result first and foremost in his quantitative bonus, not his one-year result. What a massive advantage for you to be calm and build conviction and not have to be so reactive and selling at the whim of someone else's short sale, f…

AI assessment note: “He's measured on his eight-year result first and foremost in his quantitative bonus”

Q How do you think about optimizing the talent in the organization? Because you can imagine you're probably not going to have that high of a hit rate on your hiring decisions up front.

A Part of it gets back to the incentive system. First of all, you and I manage money in a portfolio. Ted manages fifty billion. I manage five billion. If our investment results are the same and our tenure at Capital Group's the same, our bonus is the same. Meaning we don't incentivize a money grab to manage as many assets as you can. You optimize it by allocating it to individuals in the way that best suits the portfolio and their style. You don't have to manage a lot of money To do well for yourself, you have to do well on the assets we ask you to manage. That's part of the culture. We don't pay on assets, we pay on investment results. The other part is we have a lot of data. Because analysts manage money and don't just buy, sell, rate stocks and bonds, you know about them as an investor. By the time you've asked them to take on diversified portfolio management responsibilities 10 or 15 years later, You have a book of record on them, that's 10 or 15 years long, because they were already managing money. So how you put them in a certain strategy, are they growth tilted, are they value tilted, it helps you by knowing their history, because you can look at their results and their pattern of results. You optimize it by putting the right people in the right portfolios, by managing them over the long term, not the short term, and by managing a certain number of assets, but not having t…

AI assessment note: “You optimize it by putting the right people in the right portfolios”

Q I'd love to turn to the ownership model. As this private partnership, you mentioned that John B. Lovelace sold shares back in the fifties when the business was profitable. How does that work today with a much larger organization and more people involved?

A 60 years ago, it was in the hallway. It is different today. If you become a shareholder of Capital Group, you hold it for your entire career, and upon retirement, over two, four, and six years, you then sell it back to the company, and we sell it on to the next shareholder. It's not a liquid holding. It's not meant to be. It's meant to be with you for the entirety of your career, and then it's meant to be passed along to the next generation who will do the same thing again. That's a really important mindset. The mindset of the Lovelace family was not optimizing for the Lovelace family. When JBL founded the company, he said in 1931, when my grandkids, who didn't exist at the time, when my grandkids pass away, no one in the Lovelace family should own any bit of Capital Group stock. There's very few founding families that would say that, His point was, it should be owned by the people who are working at the company at the time who are driving the client outcomes. That is a very powerful statement to make nearly a hundred years ago. That means you're so aligned with the client's interest. That was a brilliant thing to do nearly a hundred years ago.

AI assessment note: “upon retirement, over two, four, and six years, you then sell it back”

Q What are some of the ways you've found to make that communication work to be in one of those organizations around the world?

A We travel a lot. Our folks do. They travel to see companies. Last year, they did 21,000 company meetings. 21,000. That is a huge amount of company meetings to do around the world in one year. You have to travel. You have to travel together. When you sit at the table with a company management and you hear each other's questions, it makes everybody smarter. So you travel not just to see the companies you own or may own, but also to see your colleagues and travel with them to build rapport. We have retreats where people spend time together. We have people who do meaningful office stints in another country for a period of time. All of these things keep a big world small.

AI assessment note: “We have retreats where people spend time together. We have people who do meaningful office stints”

Q That big change of offering choice, how have you, as you came into this leadership seat, tried to tweak the model for capital or your leadership initiatives around choice?

A The mindset of our whole leadership team is we have this intellectual capital. At the base, that's what capital group is. How to deliver it for clients in the way they want to consume it, and not be judgy about that. It's this vehicle of choice mindset. What's the right investment vehicle? Depends on the tax position of the client, where they live. For us, it was getting over the fact that we would have a multitude of vehicles Because that does create time and energy and noise in the system when you have more and more vehicles available for clients. Once you cross that Rubicon, once you're able to say it's all about the client and how they'd like to consume our intellectual capital, it's liberating. And it's ETFs, collective investment trust, separately managed account, Luxembourg funds, institutional separate accounts, mutual funds. It's not about the vehicle. It's about what's inside. That was the unlock for us is let's just make our intellectual capital available. If you look at our strategic plan, and we have these four pillars, one of them is evolve with clients. This is that. This is saying this is what our clients are looking for. How do we deliver it to them?

AI assessment note: “getting over the fact that we would have a multitude of vehicles”

Q How about new initiatives for that fourth part of the strategic plan on the associate experience?

A We launched something called Career Hub. You can think of it as internal LinkedIn. With AI, not every single job at Capital Group today will be the same in three years, five years, 10 years. Instead of just acknowledging that as a truth, let's figure out how to make sure that we know what our associates want to do in their career, regardless if their job's going to change or not. They may have a different idea of what they want to do. Create your profile. Here's what I do today. Here's how I came to Capital Group. Here are my skills, and here's what I may want to do in the future. You also have managers, before they look externally, look into CareerHub to see if there's a match of someone internal before they go external. That's an example of investing in culture in the associate experience is create that internal network and web for people to be able to develop their careers and take a different role internally.

AI assessment note: “We launched something called Career Hub. You can think of it as internal LinkedIn.”

Q What's an example of how you've tried to simplify the organization?

A How many committees report to management committee? How many committees report to the capital operating group? The number of committees that report to both of those oversight groups is Is down 50% in the last handful of years. Intentionally saying, you don't have to climb up the mountain and come to Capital Group Management Committee and have us bless something. We trust you. It's through empowerment, through structure and governance, we instituted this SABER process. Come in semi-annually. Don't come in with a 118 pages. Come in with two pages. Tell us what's working well, what's not, and how can we help? Let's have a conversation. Don't gold plate a PowerPoint presentation for us. Let's engage in a dialogue. We'll have oversight of the overall budget of Capital Group, obviously. But once we've made those decisions, and we have this long-term strategic plan, do your thing. So that empowerment takes down a lot of the overly complex system that can exist in any company, by the way. It's not just Capital Group. Most companies have way too much structure and governance and And in some ways that becomes job justification and it doesn't allow people to have the ownership of their own plan. Everyone at Capital Group, all of our entities took our long-term strategic plan for 20, 31 and made it specific to their group. Once they have that and we've approved that, you don't have to repo…

AI assessment note: “The number of committees that report to both of those oversight groups is down 50%”

Q wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now back to the show. I'd love to dive into the capital system and the investment model. How do you describe how this comes together with analysts managing portfolios, portfolio managers managing portfolios?

A It can sound complex, but it's pretty simple. No investor should want to be with a company where you're left with a single individual's 300th best idea. That's what happens. When you're a sole practitioner in a strategy, and you're managing a lot of money, and you're diversified, you could be left with someone's less high conviction parts of the portfolio. The bottom 25% of their conviction names, why would you want those in a portfolio? You have analysts who are subject matter experts in a certain sector, and they have high conviction, you want those stocks in the portfolio. Your analysts who have conviction in their subject matter expertise, Great. Those names make their way into the portfolio. You have portfolio managers, five of them, 10 of them, whatever the mandate would be, all expressing their conviction, all seeing what everyone else is doing, all using the research that we have internally, all having their own individual conviction. What you end up in a portfolio is everyone has the same mandate, but you have the strongest convictions of individuals not being left with any of their lower conviction ideas. Think of it as a multiple portfolio manager and analyst run best idea portfolio, as opposed to such a broad, diversified one person's strategy.

AI assessment note: “multiple portfolio manager and analyst run best idea portfolio”

Q It sounds like there could be a quantitative overlay that puts all this together. How much of the way you construct portfolios are that bottom up, either the analyst, the portfolio, best ideas, and then a model or something telling you this is how we're going to deliver the optimal outcome?

A Our results have always been driven by bottom up best ideas, and we can structure data so much better today than we could 20, 4060 years ago. Knowing how people tend to invest, knowing their strengths and weaknesses, Knowing how they do in different environments helps you size them in the portfolio. They're not emotional about it because we don't pay people on the level of assets they manage, only on their results. What's unemotional in terms of how much money you allocate to them to manage, you're just asking them to do a great job on what you've asked them to manage. So when you have all of that data about how they've done, interest rates are at a certain level, they're coming up, they were coming down, Market valuations are X or Y. Over the last 2030 years, how has this investor done in that kind of environment? You have this kind of data. It helps you size people right in the strategies they manage it, and then you let them run. You let them pick their best ideas. If you do that well, you're going to get good outcomes.

AI assessment note: “Our results have always been driven by bottom up best ideas”

Q And someone who comes in, and let's say it's out of school, and you say, okay, you're an investor, you have three to six months, come back to us. How do they train and get better?

A We give them an open door. We give them a mentor. We give them a couple folks to lean on during those early days so they don't feel lost. And making mistakes is okay. The two standard questions I'll ask to investment professionals on our podcast, which is meant to show the secret sauce of Capital Group and the mindset of our investors. I ask about the investment edge, like I mentioned with Rob Lovelace. Then I ask about lessons learned. And everyone has a story. Investing's a humbling effort. They'll say, I was three years in, I was looking at this consumer company in Brazil. I believed in what the management was saying. And the stock went down 80%, and here's what happened, and here's who I leaned on internally and said, oh my god, am I going to get fired? What's going to happen now? And here's what they said back to me. So everyone has that story of, how did I learn? How did I make a mistake? Who put Humpty Dumpty back on the wall after that and said, it's going to be all right. Take this lesson away so you're a better investor in the future. That's really important to be able to Be self-deprecating, to be honest, to make mistakes, and come back and be better thereafter.

AI assessment note: “We give them an open door. We give them a mentor.”

Q How did a hundred professionals become the right size to then start the second organization or the third?

A I wouldn't say we know for the next 20 years if around a hundred is the exact right size. I don't think we know what that will be. What we have found in the last 20 years is somewhere between 80 and a hundred is the right number, and it's about the investment dialogue. How many analysts do you have in the group? How many portfolio managers in the group? How many traders in the group, which are an important third leg of the stool? How do you make sure the communication moves the way around the globe to get the best ideas on the table so that they can be scaled in the portfolio? That's really important. A lot more than a hundred people makes it hard. It's just something we found over time. If we ever needed to add a fourth equity group because assets were such and we had to, again, reinvent ourselves to stay small, we would do that. We're not at the stage to do that today. But would we do that in the future to make sure we can generate the same or better results? Absolutely. It costs more money. It takes organizational effort and time, but it's worth it to stay small so ideas percolate to the top.

AI assessment note: “it's about the investment dialogue... A lot more than a hundred people makes it hard.”

Q How do you think about it from your lens of the business context where there's more finite market share in the public markets and a growing market Allocation to alternatives and how you want to participate in that?

A What has been lost in this conversation is how big the public markets are and how well they've done. Whenever I get the private markets question, I have to remind people of the facts. Look back 30 years, and someone will say, well, why are you using 1995? And I'll say, because I wanted intentionally to bring in two 50% bear markets. In the dot-com bubble and the global financial crisis. Both times the S&P 500 fell 50%. Let's use a time period that includes both of those. If you look over 30 years, the S&P with dividends reinvested has annualized about 10% return. That is super good. If you look at the growth of the size of the public markets, in 1995, the U.S. total market capitalization of the stock market was five trillion. Today, it's 65 trillion. That's just the U.S., and the U.S. is about 65% of the world index. That's a hundred trillion dollar public market. Big, liquid, transparent, relatively inexpensive, 10% annualized returns. During that thirty-year period, if you look at MSCI, all-country world, and you do it in Euro terms, I think it's about eight or eight and a half percent return. These are great returns. So can people benefit from alternatives? Absolutely. Can they use them? Absolutely. Is there diversification benefits and return benefits over time? Absolutely. But let's not, as an industry, disparage something that's worked incredibly well over the last hundre…

AI assessment note: “What has been lost in this conversation is how big the public markets are”

Q What are some of the downsides of being as big and powerful as capital is today?

A If you combine it with the question you asked on public profile being up a bit, there are some benefits to being under the radar. When you're on the radar, you get in the news cycle and the news flow more than you had in the past. Not all of those stories are going to be perfect. We have to condition ourselves to know with a higher profile and You're going to be in the news more often. That's different for us, and to make sure internally that it doesn't distract us from the mission at hand. The news story was out there. Most of them will be good because we're a calm, good, long-term enterprise, but maybe one will be a little bit noisy, and to remind our folks internally, focus on the mission, let the news cycle run its eight hours, and keep moving.

AI assessment note: “When you're on the radar, you get in the news cycle and the news flow”

Q If you tease apart that one example, so the first is the recruiting piece. How do employees generally find their way to Capital?

A Our process is not an easy one. It takes time. It can take six to 12 months of the interview process to join Capital. We're trying to be quicker on that today than we were 20, 3050 years ago. But not too, too quick. We want you to meet a lot of people. We want you to interview us. People stay at Capital their whole careers. This is not a job to leave for another job. This is a job to stay. If you knew at the onset you were going to be at a company for 30 or 40 years, you'd want to do your diligence the way we want to do our due diligence. We're both doing that. And that takes a lot of time and a lot of meetings. Occasionally, could we lose a candidate because it takes too long? Yes. Is it worth it over the long term to find the right people and have the right people self-select into an entity that leans into and favors long-term employment here? Yeah.

AI assessment note: “It can take six to 12 months of the interview process to join Capital.”

Q What goes into determining who can become a shareholder?

A We don't focus as much on The exact number of shareholders we have, because we have a very generous profit sharing program for our 9400 associates. Not all 9400 associates can be shareholders, technically, by the rules as well. It's really about sharing and profitability of Capital Group. I don't love to focus too much on shareholder, non-shareholder. It's more profit sharing, and if we're successful for clients, how do we make sure everybody participates? Last year in our profit sharing program, we increased the formula for everyone as well. We try to share the wealth amongst as many people as we possibly can. If you come and work at Capital Group for the entirety of your career, we generally have benefits that are top decile or top quartile. It's a good place to work. It's a good culture, but it's not only about the set number of shareholders or the fluid number of shareholders. It's about everyone sharing the profitability.

AI assessment note: “I don't love to focus too much on shareholder, non-shareholder. It's more profit sharing”