[Awards Q&A] 2020 Best Fixed Income Fund House Winner - Capital Group

We see fixed income as having four roles in an investor’s portfolio: diversification from equities, income, capital preservation and inflation protection. Providing dependable income is a central function of a bond allocation and many investors have turned to investment grade corporates, high-yield, emerging market (EM) debt and “multi-sector” offerings to fulfil this need.

The key drivers of the outlook for these sectors can be categorised as follows: fundamental (i.e. corporate credit fundamentals as well as sovereign creditworthiness); technical (e.g. bond demand/supply balance) and valuation (e.g. whether yields are higher or lower in a particular sector compared to others; how tight credit spreads – the gap between the yield on credit and US Treasuries – are historically). An example of the latter two factors is the “rush for yield” that has characterised market behaviour, and whether it will continue into 2020.

The outlook for growth, inflation and therefore monetary policy in 2020 remains key to fixed income returns. We see catalysts for an improvement in global growth this year, coupled with monetary policy that overall will continue to be accommodative. In all, we think this represents a positive backdrop for the above sectors over the course of the year.

Having said that, the spread of COVID-19 beyond Asia to Europe, the Middle East and Latin America has impacted both emerging market and high-yield debt as global flight-to-safety flows reinforce the risk-off sentiment. While much is still unknown about the extent of the outbreak — and, crucially, how long it may last — investors are now worrying about a broader and potentially deeper global slowdown. 

Market psychology is often highly predictable during times of crisis as investors tend to overreact to distressing news. When markets are volatile, traditional relationships can break down and markets can move further than thought possible before a crisis. This creates opportunities for research-driven investors who can identify when valuations have moved too far from fundamentals. Assuming the situation does not descend into a global pandemic over a prolonged period, we maintain our view that the coronavirus will prove to be immaterial to the long-term value of markets.

Q2) What do you think are the success factors in your corporate culture than enable your firm to consistently deliver for investors?

Capital Group’s culture stems from our singular focus on improving people’s lives through successful investing. First and foremost, we are focused on meeting investor needs. The combination of our core values (collaboration, rigorous research and long-term focus) and investment philosophy (intensive global research, fundamental bottom-up analysis) helps us pursue superior long-term results for our investors.

Our collaborative culture is fundamental to our investment process, a multi-manager system designed to enable individual investment professionals to act on their highest convictions, while helping to limit the risk associated with isolated decision-making. We go to great lengths to foster open discussion and debate, so that portfolio managers and investment analysts can share their best ideas, have those ideas challenged internally, and challenge the ideas of others.

Intensive global research is part of our investment philosophy. We seek long-term value in fixed income by devoting significant resources to internally generated, fundamental research. Our fixed income analysts evaluate companies’ management structures, financial strength, resources, products, services, business climate, future earnings and dividends.

Our on-the-ground research (company visits, discussions with suppliers, interviews with federal agency staff, and visits with central bank staff members, politicians, national bankers, regulators and industry leaders) is combined with comprehensive macro analysis, with our equity and fixed income analysts working together to pool resources. Such a process has the potential to deliver compelling investment ideas and gives portfolio managers a broader and deeper understanding of risk.

Our ownership structure, combined with our active, long-term approach to monitoring and managing results, provides significant incentive for investment professionals to contribute at a consistently high level over many years. As a privately held firm, we want to provide for the smooth transition of ownership to the emerging leaders and successful investment professionals within the organisation. This ensures stability and helps to maintain our long-term focus. This is core to who we are and essential to our ability to generate superior, long-term results for our clients.

Q3) Can you share some of your future business plans with us, such as the launch of new products?

We are continuing to build out our fixed income fund range as a part of our multi-year strategic plan to bring the best of Capital Group’s fixed income strategies to clients in Asia.

We’ve accelerated engagements with key strategic partners on fixed income strategies that we believe will benefit investors in the current market environment. This includes a strong focus on Capital Group Global High Income Opportunities (LUX), a fund that aims to provide investors with a high income yield, through investing in a broad range of well-researched securities sourced from the higher-yielding corporate and emerging market debt universes.

Additionally, we’re excited to launch a global total return bond fund in the third quarter of 2020.[1] We believe this will be a great complement to our existing fund range, as a “core plus” solution for investors seeking total return from investments in the global fixed income universe.

We have also just launched our first-ever brand campaign throughout our 30-year history in Singapore as part of a wider brand roll-out in the Asia Pacific.

The campaign tells the stories of Capital Group’s distinctive investment philosophy, centred around its goal to help improve people’s lives through successful investing. It also underscores Capital Group’s ongoing expansion in the Asia Pacific region, where we have been serving investors for more than 35 years.

[1] Launch date is indicative only, and subject to change.

Q4) How has the firm been responding to industry fee pressure?

Management fees and overall fund expense levels are critical for investors to achieve their objectives over the long term. As a firm, we have a dedicated team to establish fees for our strategies and vehicles globally. The team constantly analyses and challenges fee and expense schedules to achieve the best possible alignment. For fixed income funds, market pressure has helped investors in pushing fee levels down dramatically over the last few years – this includes strategies that require active management and we strive to be competitive in meeting that need.

As we distribute our funds in Asia, we are operating within an industry that continues to favour bundled management and distribution fees. We focus on what we can control – the management fee rates and operating expense ratios of our funds, and continue to work closely with our distribution partners to challenge fee and expense structures as regulations and the industry continue to evolve. In 2019, we approved new share classes across all our fixed income funds to offer lower fees for larger-scale investments. We also have the ability to offer these discounted fees to early adopters of newer/smaller funds during the launch period. The new share classes launched in the first quarter of 2020.

In parallel we continue to cap the operating expense ratios of our funds aggressively, recognising that the Luxembourg SICAV vehicle can be burdened by high regulatory and administrative fees that impact the competitiveness and net of fee results for the fund.

Q5) Are there plans to further strengthen your investment team? In which areas?

As at 31 December 2019, we have close to 180 fixed income professionals, including portfolio managers, research analysts, trading professionals, macro analysts, risk and quantitative analysts, investment services professionals and other fixed income professionals. Our highly experienced fixed income business unit manages US$371 billion in fixed income assets, spanning across a number of segments such as investment-grade corporates, high-yield corporates, emerging market debt, US mortgages and asset-backed securities as well as government debt.[2]

Over the years, we’ve added credit analysts and fixed income portfolio managers to enhance our research capabilities across the world. Additionally, we’ve established trading desks in Singapore and New York to complement our existing ones in London and Los Angeles. Each of our traders specialises in a given asset class and a given sector. Compared to generalists, we believe that dedicated sector specialists tend to obtain better liquidity in secondary markets.

[2] Assets managed by Capital Fixed Income Investors. The Capital Group companies manage equities through three investment divisions that make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organisation; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.

View all Morningstar Singapore Fund Awards 2020 articles here.