Mike Gitlin - CEO of Capital Group | Podcast | In Good Company | Norges Bank Investment Management

Well, thank you. We can end it there.

So, we manage money for people around the world, and those people may be served by a financial advisor, and they may be a part of a large-scale institution like a sovereign wealth fund, a defined benefit plan, a defined contribution plan. So, it's both a wealth management business and an institutional business, but at the end of the day, all of that is managing money for people at the end of the day.

There's over 20 million families in the US, for example, that own something that Capital Group does, whether it's a mutual fund, an ETF, a collective investment trust, whatever way they consume that service. And globally, millions of people as well.

I'd say it's two things, apart from a really great CEO, of course.

So I think two things make us unique. One is how we manage our business, and the other one is how we manage our money. So in terms of managing our business, we don't have to think about quarterly earnings in the public space. And we have shareholders internally who understand that we're investing in the business for the long term. So the S&P 500 can be down 20%, and we can still invest in that technology project that at another company might just get stopped. So we're able to invest through the cycle in our own business, which helps our clients because we're stable. We're not super reactive to the market conditions in that regard. And then how we manage our money. In 1958, we launched something called the Capital System. It's just a different way to manage money than everybody else in the world.

It is. And I can speak about it. I wasn't alive yet. It was a brilliant concept, but it came out of a moment of challenge. At that time, our founder had had a heart attack, survived. When he came back to the office, said we can't manage money with key person risk. It's just not good for the clients. And so the Capital System was formed where the analysts themselves are investors. They're not credit raters or stock raters. They invest real client assets. And then you'd have multiple portfolio managers collaborate in a portfolio as opposed to just one person managing all the money.

It's good for a few reasons. One is an analyst who manages money has skin in the game. That's real client assets. It's not a buy rating or a sell rating. It's money. That's a very different responsibility when you're actually managing money.

So one thing you could do when an analyst manages money is they understand portfolio risk. They understand diversification. They understand how to participate in the new issue or the IPO market. They just have a different way they go about them than an analyst who rates credits. And then for portfolio managers, I think the biggest difference is you're not left with one individual's 300th best idea. You get the strongest convictions from several portfolio managers in the same strategy. Everything's open. Everybody can see everything. But you can express conviction without feeling like the weight of the entire portfolio is on your individual shoulder. But one person is responsible for each investment. Each investment strategy has a principal investment officer. They are the conductor of the orchestra, and they have accountability. But there'll be a research portfolio, and there'll also be other portfolio managers alongside, all in the same strategy, all expressing their conviction. It's just different.

Well, we don't really think about it that way. We think about who's participating in the portfolio. What are their risk characteristics? We try to combine people with complementary skills. We have so much data on them. So we know their upside capture, downside capture. We know how they manage money because as an analyst, remember, it's how much of an increase in a share price do you actually manage to capture, or the overall market when the market's going up a lot or down a lot? How much do you participate? Are you more defensive or are you more offensive?

Well, that's right. And not everyone can do that well, both sides. So, trying to figure that out.

I think what you have is you have people sitting around the table in a certain investment unit, and everything's open. There's no hierarchy. You're a portfolio manager. I'm an analyst. It's not hierarchical. And so we all share ideas. All the portfolios are open so everybody can see them. And what it does is it gets the ideas all on the table. And because you and I can express our convictions, it doesn't promote an environment of groupthink. You might have serious conviction in these names, I in different names, and we can do that in the portfolio because we'll have some diversification benefits for the client on an overall perspective. So it just makes a really open conversation at the table.

Yeah. Our folks stay. Why? They stay because of the culture. They stay because of the nature of the shareholding. And they stay because they love Capital Group. I mean, they come. We tell people when we're interviewing, if you don't think you're going to be here for your entire career, don't come. So our attrition rate for investment professionals is in low single digits. I mean, they do come for their careers.

Portfolio managers who get smarter and smarter over time but don't engage in style creep. They know the kind of manager they are, the kind of investor they are. And when markets are really skewed one way or the other, they don't engage in style creep so that when the market reverts, they're not caught off sides. That's really important. We can take care of that because we put different portfolio managers and analysts into portfolios from a top-down perspective. We can manage that kind of risk and volatility. What's hard to do is if they change their style midstream, that becomes a problem because then you get a skew in their portfolio that was...

Yeah. Are you more growthy? Are you more value and dividend and income focused? And in a roaring bull market, have you shifted that style so dramatically that you're no longer recognized as the investor we thought you were? Because if everyone did that, the overall portfolio would become way too growthy. So trying to get people to tweak their styles with education and over the markets over time, but not fundamentally change it midstream because that becomes more problematic.

I'd say there is not one single philosophy. Every individual has autonomy. If you and I are in one portfolio and we're both managing five billion dollars, we're all going to talk about ideas. You're going to go away and you're going to do what you think is best, and I'm going to go away and I'm going to do what I think is best.

It's not a bible. We try to have low turnover because there's no such thing as high turnover proving in correlation terms to produce better investment results. So in general, if you were thinking stylistically, we tend to have lower turnover than other managers of people and also the portfolio. We tend to have people who come a long time, stay a long time, and not a short time. We have to manage at scale. We do manage $3.2 trillion of assets. So we have to manage at scale. I think those are the biggest factors.

It's interesting. Incentive systems are a very interesting thing. I'm a believer in incentive systems. They drive behavior. Period. The number one driver of an analyst or portfolio manager's quantitative compensation is their eight-year number.

It's a long time. Well, and in a world where short-termism can be favored and create additional volatility, when you're eight years first, and then five, and then three, and your one year is the lowest component, smallest component of your compensation, it says don't be a hedge fund manager. Manage for the long term. In my podcast, the first guest I had was Rob Lovelace. He's been at Capital Group 40 years. He's also the grandson of the founder. He has excellent investment results. And I said to him, 'What's your edge? What's your edge, Rob?' His answer was simple. He said, 'Time. I have the time to be right.' And so, you can go against the grain. You could have a conviction that might not start off perfectly, but come into play as your thesis comes into play, but the benefit of time is a huge benefit. You don't have that if your one-year number drives your quantitative bonus.

Yep. Well, that's the plan. Why is it so difficult to be long-term? I think it can be difficult because of client expectations. I think the world in everything is so much more short-term in people's attention span, the news cycle, everything. And so when you're trying to say, well, we're saving for retirement, that can't fall into the wave of short-termism. We're trying to think of you when you're 38, how you're going to live when you're 70 and 80 and 90. And so it does us no good to look at every single quarterly earnings and make a reactive decision based on a business that's going to grow 12% compounded for the next 25 years.

It is, the whole speed is accelerating.

Yeah.

Yeah. Or the TED talks like 18 or whatever.

Well, 30 years ago, a little more than 30 years ago, passive didn't exist. So, now it's about half the marketplace in equities. So, it's massively impactful. And what it's done with flows into passive is it makes a benchmark even more concentrated. When I look at our institutional business, we're seeing our requests for proposals, our RFPs, go up and to the right. So why is that? One, I think it's because people recognize the benchmarks are super concentrated with half of the assets going into passive and fewer amount of assets in active management in relative terms. That skews the market and it makes this concentrated benchmark. So people are literally looking for diversification away from a concentrated benchmark. I never thought I'd say that.

So just so passive, i.e., you just buy the index.

And so for us, I mean, I like to say there's 53,007 public companies. There's not seven public companies. And so having the opportunity to move away from the skewed benchmark and find opportunities outside of that globally is a great advantage for active managers, and I think you're going to see that now. It depends on the manager, and I'm sure we'll talk about that. But not all the managers have strong results versus the benchmarks. And I think people were seeing low fees and active managers not beating passive, and that pushed some of the assets into passive, and now they realize they have to pick and choose between the active managers.

Well, it was difficult in the last decade because of how skewed it became, and in some rules around, especially in the US and 40 Act rules around how funds can be managed, you had concentration limits of how much you can actually own in a single stock. So, as the benchmark got more skewed, you weren't even able to do that if you wanted to. And that became an issue. As the market broadens, there's no excuses for active managers not to beat benchmarks. And I think you will see a market broadening. You're already starting to see that. The more the market broadens, whether it's in a country or globally, the more opportunities there are for active managers. And we're heading into one of those periods now, but from 2010 to 2020, heavily skewed benchmark, heavily skewed results into a small number of stocks.

Well, it depends. It depends on the group. The operating group taking commoditized functions, having them go away and having those individuals spend their time on higher value-added activities. And the world is doing that. I don't think we're any different in that regard. In the client group, you're going in to see a financial advisor on the wealth management side. Hit the 'prep me' button. It tells you everything about that financial advisor that you've already put in the system. So you can make it a more productive interaction with the advisor. You're not going in there blind. You look at all AI reads all of your notes, and the 'prep me' session just makes it so much more valuable. Translation, we put together lots of value-added content for our clients. Translation makes it available immediately for everybody around the world in their language. These are just really easy use cases. On the investment management side, think about 94 years of data. We've digitized our entire library over 94 years. Every single report on every single stock ever written at Capital Group, that's a proprietary advantage. How we utilize that data and structure that data, and in investors as well. I'm an investor. I've been at Capital Group 30 years. This environment has rates that are coming down. Valuations are relatively high. What mistakes have I made in the past in similar environments? Goes through all of my data managing money, and it tells me things to be aware of as this cycle may be the same or different, but at least it gives me an indication of some of the things I've done in the past. So, trying to use all the data we have to make better decisions. There's a lot of opportunities in that space.

Yeah, it's a great question. I mean we had three choices. We could have bought something, we could have built it ourselves, or we could have partnered. And I'm not being critical of others, but one of the main reasons you would build it yourself or you would buy something is to retain 100% of the economics. That wasn't the driving force for us. To build it ourselves, you would then have to be willing to practice on your client's money, right? Because you don't have it yet. And you'd also have to be willing to either bring in a team which could be a cultural challenge or take people on your existing team and tell them to do something different which would distract them from the $3.2 trillion we're already managing today. So we weren't willing to do that. The acquisition side again was a cultural challenge. So the only thing we had to believe in partnering is whoever we partnered with could do it better than us. And we went through a diligence process. We had a whole team due diligence on a range of managers, and we ended up with KKR. They've done it for 50 years. We'll let them do the private portion. We'll do the public portion. We'll blend it together in a client-friendly solution that meets their needs, and we'll make sure we provide education. So, it was just about not needing to achieve all the economics, but be able to deliver a better solution. It's literally what we were talking about. That's not a sales pitch. That was part of our management committee discussion of why we did it because it was the best solution for our clients.

Well, how many people would own it? I would say it's rented by the owners, meaning the owners own it until they retire and they sell it back to the next generation. The founder, this is crazy to think about 94 years ago, but 94 years ago he founds this business and says in three generations from now. So he was thinking about his grandkids who weren't born and saying when that generation passes, none of my family will own any of the stock. It will all be owned by the people who work at Capital Group at the time. Who would think that 94 years ago? So, it's really cool. And what it does is say the mentality is if you're in it, if you're picking stocks and bonds all day long and servicing our clients all day long, it's about you, not necessarily the people who are retired or the people who were integral to the business 50 years prior. So, you own it during the period of time you're at Capital Group, and then you sell it back and we start again.

I think it's huge. The way the Lovelace family did it, and now we can say no one owns more than about 1% of Capital Group. So the ownership is really widely dispersed. It just means that all of those individuals who are owners then are participating in the outcome and feeling as if their name is also on the door when they walk into the building. And I think that's really important. And not everyone can be an owner. So we make sure we have a large profit-sharing program where all of our 9,400 associates do well if our clients do well. So we do both, but both are important.

Well, we could.