330. The art of long-term investing

12 September 2024 (pre-recorded 29 August 2024)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. This week we’re covering ongoing structural change in the global economy with Capital Group’s flagship global equity strategy – New Perspective – a long-standing equity strategy that is now being made available as a UK domiciled OEIC structure. The UK fund launched in July has the same investment team and follows the same investment approach as the New Perspective strategy.

I’m Staci West and joining me today is Steve Smith, to share how the New Perspective strategy has navigated a broad range of market environments over its 50+ year history. On that note, Steve, thank you very much for joining me today.

Steve Smith (SS): Thanks for having me Staci.

[INTERVIEW]

SW: So I just wanna start with a quick reminder for listeners: What is the New Perspective fund? What is it trying to do? What is it trying to achieve? And ultimately, what type of companies are you investing in?

SS: Sure. So, the Capital Group New Perspective strategy, it’s a long only actively managed core, but structurally flexible strategy. It’s one of the oldest in the industry. It’s over 50 years’ old. It’s one of the biggest. We have the privilege of managing nearly $180 billion of client’s assets all around the world. And humbly, I think it is one of the most successful.

The strategy does have very good medium- to long-term track records and a proven ability of outpacing global equity markets over a variety of different market environments and cycles. So whether they be up or down markets or prolonged growth or value driven cycles, in terms of what we’re trying to achieve, the objective is long-term capital growth or long-term capital appreciation. So there’s no income target, there’s no yield hurdle here. And the way that we achieve this is by taking what I would define as a structurally flexible approach to investing in long-term investment opportunities arising from different types of transformational change.

So by structurally flexible, I mean, New Perspective is unconstrained by geography, by sector, by style boxes, your capital, our client’s capital, simply flows to our highest long-term convictions. And just in terms of what we mean by transformational changes the definition is deliberately broad. And of course the definition evolves and change over time, but today it could include things like changing patterns of global trade, changing economic and political relationships, and the various multi-generational secular shifts that are occurring in the global economy. So rather than be threatened by change, think of New Perspective as a fund, as a strategy, that is actively seeking to invest and thrive on long-term structural change. And I would argue that we’re going through a profound period of structural change right now.

And then just to finish up, you asked what types of companies New Perspective is investing in? Well, it’s a spectrum of multinational companies, specifically, we’re investing in a range of companies ranging from small to medium-sized fast-growing early stage multinationals, so potential future global champions, all the way up to the large, mega-cap established global multinational champions of today. So essentially we’re trying to build a portfolio of today’s and hopefully tomorrow’s global champions.

SW: Now, our listeners will know that there is no shortage of global equity funds available to investors. So what makes this fund different? What are the differentiating factors of the New Perspective fund?

SS: So you’re right, there are lots of very good global equity strategies out there, but I think what differentiates New Perspective from those others is undoubtedly the consistency of the outperformance over different market environments and cycles, whether they be up markets, down markets, or prolonged growth or value driven cycles.

New Perspective has outperformed the global equity market during almost all prolonged growth and value cycles over New Perspective’s 51-year history dating back to the 1970s. And I think this consistency of outperformance across different market cycles and environments is a result of three things.

So first of all, New Perspective has always invested in an enduring and growing opportunity set of global multinational companies. Secondly, I think it’s part of the consistency of the investment process and the stability of the investment team. And thirdly, I think the consistency is a result of the structurally flexible approach that New Perspective employs. It is unconstrained by geography, by sector, by style. That flexibility allows New Perspective to invest in the next generation and the next cycle of global economy and stock market leaders regardless of what geography, sector or type of style a company is.

So maybe I’ll just briefly talk about each of those three to bring them to life. So first of all, New Perspective is always invested in an enduring and growing opportunity set of multinational companies. I think one of the keys to New Perspective’s long-term success is this focus on global champions. And by that I mean multinational companies that are well positioned to drive shape and ultimately benefit from long-term structural changes. These are the types of companies that have the ability to deal with an increasingly complex world due to their adaptability, their flexibility and their resilience.

And I think if you look back, a multinational mindset has proven to be an effective filter for company selection for New Perspective. Just sticking with this notion of investing in multinational companies, another contributor to the long-term success of New Perspective, I think, is a proven track record of identifying and investing in potential future global champions long before they become industry leading companies and household names. And then, and really importantly, having the courage, the conviction, the wisdom, the patience, to carry on owning these and investing them over the long term.

If we just look at the top 20 holdings of New Perspective today, there are plenty of examples of us identifying these potential future global champions long before the markets. I’ll give you just a couple of examples. So we’ve consecutively owned TSMC today, the world’s leading semiconductor foundry since 1999. We’ve owned Novo Nordisk consecutively since 2003. Back then it was a $10 billion market cap company. Today it’s Europe’s largest company by market capitalisation. We’ve owned Broadcom in New Perspective consecutively since 2010. Back then, it was a $6 billion market cap company. Today it’s over 700 billion. New Perspective has also owned Netflix and Tesla consecutively since 2014. So a proven track record of identifying these future global champions.

In terms of another factor I think that really explains the consistency of the long-term success of New Perspective is the consistency of the investment process and stability of the investment team.

So New Perspective’s investment process hasn’t changed in its 51-year lifetime. New Perspective’s investment process essentially combines individuality and teamwork. So the portfolio is divided into segments. Each segment is managed by a different portfolio manager (PM) or investment analyst, and each PM is carefully selected to ensure that the New Perspective investment team has different and complementary approaches and diverse perspectives.

Currently there are 11 components to the New Perspective investment team – 10 are global equity portfolio managers, each receiving a portion of capital and each constructs their own independent high conviction sleeve. The 11th component is what we call the research portfolio. That’s the part of New Perspective being managed by our in-house career investment analysts. And what we’re doing is we’re asking each of them to invest in a very, very small number of their highest convictions in the industry or sector that they’re responsible for.

So in terms of stability of investment team there’s only ever been 14 other global equity PMs in New Perspective’s 51-year history. And I think the key benefits of having this multiple manager approach are, one, there’s no key person risk. Two, we naturally embed generation planning and succession planning into our investment process. And thirdly, if you look at the individual PM sleeve level, you get concentration and conviction. But at the total fund level, when they’re brought together and aggregated, you get natural balance and diversification.

And then just to finish up structural flexibility, I think this is really important. New Perspective, as I’ve said, is unconstrained by geography, by sector. It’s not constrained to any particular investment style boxes. What that means is the flexibility allows the PMs to reposition the portfolio to invest in the next cycle and the next generation of leaders regardless of what geography, sector, style or type of company it is. So if you look back over history, New Perspective’s exposures by geography, sector, investment style, et cetera, have, can and do change quite profoundly.

SW: You mentioned an excellent 51-year history of the strategy, and we’ve talked a bit about the long-term performance of the strategy, but what are your current views on markets medium to long term?

SS: Sure. So maybe I’ll just start with economic growth inflation and rates briefly, and then we can touch upon implications on equity markets. So in terms of economic growth our expectations are resilient growth for the world economy, but with a mild slowdown in terms of global GDP growth this year compared to last year. So positive, but not as strong as last year.

I think more importantly, there’ll be significant divergences in both the short and long-term growth rates amongst a number of the major economies in terms of inflation. Clearly inflation rates are falling, but they’re also stalling. And I think wages and labour costs will determine if inflation rates ultimately stabilise at central bank targets. We do think that there are some potential upside risks to inflation, and they would include continually tight labour markets, large budget deficits and trade tensions and tariffs, which by definition are inflationary.

Now we know many central banks have already started their monetary policy loosening cycles, but we also think that central banks will probably be cautious about cutting rates by too much too soon. Therefore, we think market expectations for rate cuts for the rest of 2024 could be too aggressive, especially for the US Federal Reserve. That said, if we do see further rate cuts in 2024, history suggests that this could offer strong support for equity markets, especially if those rate cuts are not associated with a recession.

So just in terms of our views on equity market outlooks over the medium to long term, we think the world is in the early innings of a profound secular change, the scale of which we probably don’t see very often, maybe every 10 to 15 years. If you think about it, most of the last 40 years has been characterised by declining rates, low and stable inflation, rapid advancements in globalisation and relative geopolitical stability since the end of the Cold War. Things are now changing. We think we’ve entered a new era.

We think we’ve entered a new economic regime characterised by rates and yields that are reverting to higher historic, but historically normal levels. Inflation is falling, but it is stalling. We think it is still uncomfortably high and will remain so for longer than markets are pricing in because some of the inflationary headwinds that we’re witnessing are more likely structural than transitory. There are clear signs of deglobalisation, for example, rising tariffs, rising protectionism and greater number of trade wars.

And the geopolitical landscape now is clearly challenged. It’s on a knife edge and finally balanced. So we think this new economic reality will likely define the next decade of equity investing. And if that’s the case, there will be some implications on equity markets.

Number one: there’ll be new equity market leadership formation over the next cycle. Secondly, we think there’ll be greater breadth of equity market leadership. So markets will be less binary, less one dimensional, not driven by a small number of stocks. Thirdly, we think that earnings growth will return to be the primary determinant and driver of total returns from equity markets and individual stocks going forward. So a welcome return to fundamentals, but the other point I just want to leave the audience with would be we think we are arguably in a unique period in history right now, and by that I mean we are witnessing a rare confluence of numerous structural changes that are all occurring at the same time.

These structural changes include continued digital innovation and disruption. We’re in a golden era of healthcare innovation. There’s a requirement for an energy transition, energy security, evolving globalisation and supply chain reconfigurations and just probably a more permanently higher spend on defence amid a more permanently higher geopolitical risk environment. And we think that a confluence of structural changes is another reason why we might see greater breadth of leadership in equity markets going forward.

SW: You probably just mentioned close to a dozen different things influencing global markets today, if not more. So how do you go about positioning a fund in light of all of those structural changes, and as you said, inflation, monetary policy, you’ve got geopolitics, the list certainly goes on. So how are you positioning today? Are there things that you like, you don’t like? Give us a bit of insight into the portfolio.

SS: Sure. I think I should probably start by saying that New Perspective is deliberately well diversified by geography sector, investment theme, investment style, the type of company, the market cap of the company, and the number of holdings. So we are not constructing New Perspective based on a short-term market outlook or a small number of top-down binary outcomes.

I think it’s interesting to split New Perspectives portfolio positioning by areas we like and areas that we dislike, or like less. And all of this, by the way, is based on bottom-up company selection. It’s not top-down views, but we continue to like digital disruption and innovation. We think we’ve entered a golden period of healthcare innovation. We are investing quite heavily in what we are defining as an industrial renaissance, which we think could set the stage for a capex supercycle the likes of which we probably haven’t seen for three to four decades. And that might drive a sustained period of earnings growth for a number of industrial companies. And we continue to believe in the rise of the mass affluent emerging market consumer. And that’s being expressed through a number of different ways. If you take those four or five areas, the significant majority of New Perspective is exposed to those areas.

In terms of areas we like less or don’t like we have very limited exposure to what I would define as old economy industries. So banks, energy, telecoms, utilities, they collectively account for less than 10% of New Perspective’s exposure. And we’ve been structurally underweight, underexposed to those industries and sectors for much of the last 20 years. We think that many companies in those sectors have optically cheap valuations. We think many companies in those sectors are probably value traps. We think their business models are being dis-intermediated and are in secular decline. We think that their business models are being disrupted by new entrants to the picking off the profit pools of incumbents. So we don’t believe that for these companies, their valuations will mean revert and we’re not tempted by the cheap valuations of companies in in many of these sectors.

SW: I just want to highlight a few of those areas, maybe a little bit more in depth, those themes and those areas that you like. And I wanted to start with healthcare. I actually, knowing that I was coming here today, I read a book on healthcare this morning on the train, so I was prepared. But what are you seeing in healthcare innovation specifically that kind of piques your interest or has you saying this is a long-term trend for the next decade?

SS: So we think we’re investing in a golden era of healthcare innovation and we think that this era will have multi-decade tailwinds driven by a rapid increase in the number of novel drug platforms that’s really accelerating the pace of drug innovation and leading to more bespoke medicine solutions.

In particular, we’re focusing on companies that have these transformative mega drugs like the GLP-1s that we think could lead to a prolonged earnings upgrade cycle. We’re also interested in select SMID, so small and medium sized capitalised companies, that have strong clinical data and are addressing large, expanding but currently underserved medical end markets. We’re also thinking about M&A targets as well. Big pharma is actively shopping to bolster their drug pipelines in their 2025 to 2030 revenues. We think big pharma’s looking for companies that have phase three ready assets or early stage four in class new science and or companies with very innovative drug technology platforms like RNA interference, gene therapy or gene editing.

So we believe we’re actually in a third wave of healthcare innovation, which we are defining as the genetic era. We think it probably started several years ago and it really came about because of breakthroughs in genomic sequencing and data processing. And that’s really led to a deeper understanding and knowledge of genetics and has led to the creation of highly targeted precise interventions like RNA interference, gene editing and gene therapy. And these precise interventions are starting to tackle a variety of genetically defined diseases.

I’ll just briefly explain what a couple of them are. So RNA interference is an innovative platform technology, and what it does is it silences, it shuts down the malfunctioning gene that is causing or contributing to that genetically defined disease. Gene therapy is similar but slightly different. So it transplants a normal or properly functioning gene in place of a missing or malfunctioning gene. So these are some of the areas that we’re particularly interested in at the moment from a healthcare innovation point of view.

SW: You mentioned another theme that is I think, is pretty unique to you, I don’t think I’ve heard it often, which is industrial renaissance. So maybe just elaborate on that one as well.

SS: Sure. So if you think about it in the post global financial crisis era, I think most people have quite probably correctly preferred to invest in what I would describe as the sexy, disruptive, asset light technology, biotech and healthcare companies. In contrast, the more boring old economy manufacturers of things, of physical stuff, have largely been overlooked. We think that’s changing.

The reason for that is we think we’re entering a period that we are defining as an industrial renaissance, and this is really being driven by a variety of old economy industrial companies that we think are transforming themselves into secular growth companies because they are enabling and benefiting from various multi-year trends that we think will set the stage for a capex super cycle, the likes of which we probably haven’t seen for three to four decades, that again could drive a period of sustained earnings growth for selected industrial companies.

So just to give you some examples of these multi-year trends it could be the US energy transition. There’s the requirement for energy security in Europe. We have got evolving globalisation and now this preference for supply chain reconfigurations. So it’s about near-shoring and onshoring supply chains, and there’s a preference for resilience and robustness of supply chains rather than efficiency. There’s also the build out of data centre infrastructure where AI workloads will run. And on top of that, we think there will be a more permanent increase in defence spend amid a more permanently higher geopolitical risk environment. So that’s our thoughts on the industrial renaissance.

SW: As I said, very unique to you. Now we’ve had two parts of this interview: we had the first part where we talked about the excellent 50 year history of the strategy, but then we’ve also talked about how things are changing and evolving and we’re undergoing structural change. So how does a process that is 51 years’ old stay relevant today just as it was when it first launched?

SS: It’s a really good question. And when I look at New Perspective, I think there are five enduring characteristics that are particularly relevant in the current market environment. The first one would be New Perspective is time tested. It’s built to last, it’s been around for more than 50 years because it’s specifically designed to invest in investment opportunities that are coming and arising from transformational change. If you think about it, change is constant and as I’ve explained, I think we’re going through a profound period of structural change right now.

The second enduring characteristic that I think is just as relevant today would be New Perspective’s structurally flexible approach. I’ve hopefully made a case that we think that there will be new equity market leadership forming over the next cycle. If that is the case, then a fund like New Perspective that is unrestricted, unconstrained by geography and sector unrestricted in terms of style boxes. I just think that is a type of fund that is better equipped to adjust to this new reality of investing.

The third characteristic would be New Perspective by design, as I’ve mentioned, is deliberately well balanced and well diversified. There is a lot of uncertainty out there at the moment in terms of the economic growth, the path around rates and inflation and just broadly financial markets in general. Against that backdrop, New Perspective offers a well diversified portfolio that isn’t based on a few or a small number of top down binary outcomes that may or may not come to fruition.

The fourth characteristic that I think is really overlooked but is tremendously important is long term. We are clearly operating an industry where holding periods are declining and investment time horizons are shortening against that backdrop. New Perspective continues to take a truly long-term investment horizon. The average holding period of the strategy is around four years and over 60% of the current portfolio has been owned for more than five years. And I think at Capital Group broadly, we believe that the ability to take a long-term view and look beyond short-term noise is one of the few remaining inefficiencies in financial markets today.

And then the final characteristic that I think is really important and relevant today is that New Perspective has a history of delivering durable client outcomes. If we can continue to construct a well diversified and balanced portfolio, if we can continue to use the structural flexibility to pivot and reposition into tomorrow in the future’s global economy and stock market leaders, if we can continue to take a truly long-term investment horizon, even when markets in the short term are telling us we’re wrong, then I think we will hopefully be able to continue to deliver these durable client outcomes. And the way I define that with a durable outcome is attractive long-term investment returns after fees that are in excess of global equity markets.

SW: And what does that mean for our listeners? Where do you see this fund fitting into their portfolio?

SS: So the two words that spring to mind would be core and foundational. I like to think that New Perspective could serve as a core foundational equity investment in somebody’s portfolio. As I said, it’s time tested, proven, well diversified, been around for more than half a century. The feedback we often get from clients is New Perspective is their sleep at night, global equity allocation. The analogy I like to use is if you’re building a house, constructing a house, you want to have very stable, very solid foundations and footings. I think New Perspective can serve as that foundational investment when somebody’s building and constructing their own equity portfolio.

SW: Well, Steve, thank you. That was brilliant and a really good overview of the strategy, what you’re looking at today and also into the future. So thank you very much.

SS: My pleasure. Thanks very much for having me.

SW: The Capital Group New Perspective strategy has been time tested over 50 years as Steve outlines in this interview. The strategy invests in some of the world’s largest multinational firms that are able to benefit from transformational changes in the global economy. For those looking for large cap global growth exposure with active management, but without having to worry about manager change or style drift over the medium or long-term, this is a compelling option. To learn more about the Capital Group New Perspective strategy please visit fundcalibre.com

[DISCLAIMER]

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.

All information as at 31 July 2024 and attributed to Capital Group. Statements represent the opinions of that individual and may not necessarily reflect the view of Capital Group. This material is issued by Capital Group UK Management Company Limited.