Forget the cycle: why stock picking can work


If anyone needs an example of how active stock pickers can add value over long periods of time, you don’t need to look much further than Capital Group – at least with its flagship ‘New Perspective Fund’. The fund belies its name, having a 46-year history. Capital held media and investor briefings in Australia last week.

As is well known in the institutional world in Australia, Capital is a US-based bottom-up manager, across equities, fixed interest and multi-asset portfolios. It manages nearly US$2 trillion of assets. It claims to be style agnostic, although its portfolios currently suggest a growth bias.

Matt Reynolds, the investment director for Australia and New Zealand, said at a Sydney briefing last week, that recent results had been driven by outcomes in the financial and healthcare sectors. “This is a very diversified fund, though,” he said. “We’ve had very strong recent performance but also our benchmark has a strong rally… But, for investors in global equities, a company’s fundamentals have become more significant than ever.”

Over the past 25-or-so years, correlations between US and non-US equity markets have more than doubled, Reynolds says. “This has effectively reduced geographic diversification benefits for investors as the lines between US and non-US indices have blurred, meaning that when investing in global equities, we believe it is more important than ever to understand company fundamentals,” he says.

“Sector and country-specific factors will, of course, still influence business profits but the most compelling companies are led by strong management teams that can overcome macro headwinds and become the next big growth opportunity.”

Looking ahead, Capital’s equities team is suggesting that the global software sector is a key. This sector has been growing at 9 per cent annually, Reynolds says. “Spending on software is growing faster than both the broader IT industry and global GDP as it becomes more mission critical and a source of differentiation for all industries.”

Reynolds says: “With trends such as the shift to the cloud and the rise of subscription-based business models, the ability of software companies to expand their addressable markets is significant and growing. We expect this to be a key thematic that will identify companies… which may grow into the types of multinationals that [the New Perspective Fund]has invested in for over 40 years.”

The fund’s performance has, in fact, been extraordinary. On a pre-fee basis over the 46 and-a half years since 1973, it has returned an annualised 14.8 per cent, versus the MSCI ACWI index return of 10.1 per cent. Arguably more remarkable, is that the fund has delivered on an after-fee basis, an annual return of 13.6 per cent. And the “after fee” returns are bulked up to reflect retail fees.

Paul Hennessy, Capital senior vice president and head of Australia, says that a defining feature of the strategy is the consistency of its outperformance over a long time period. He didn’t say this, of course, but if you were a value manager and the fund was a stock, you’d probably want to sell it to cash in on the rewards.

What he did say, though, was that it was important for investors to stay invested when markets were volatile and get the bounce markets can have after a downturn. “As global markets turn their attention in 2020 to a pivotal US presidential election in November, investors should remember that US election results, historically speaking, have made no difference when it comes to long-term investment returns in US equities,” Hennessy said.

– G.B.